9.What is Say’s Law and what do classical economists say about prices, wages, and interest rates? What are the three states of the economy in relating the real GDP to natural real GDP? In a recessionary gap, is there a surplus or a shortage of production? What does that imply about the labor market and how wages may change? Understand the differences between a recessionary gap, inflationary gap, and long run equilibrium.

How is the physical production possibilities frontier (PPF) different from the institutional PPF? Which lies closer to the origin and why? Understand the role of wages in the self-regulating economy and what “laissez faire” refers to in determining public policy.

10.What is the Keynesian perspective on prices, wages, and interest rates? Why do savings and investment not depend entirely on the interest rate? Why are wages inflexible downwards?

How is the Simple Keynesian Model different from the Aggregate Supply/Aggregate Demand (AD/AS) Model? (Hint: Price level is assumed to be constant.) In the components of total expenditure, why is inventory important and why may planned investment be different from actual investment? If total expenditures exceed total production, do inventories rise or decline? As a result, does total production and total employment rise or decline?

What is the marginal propensity to consume (MPC)? What is the marginal propensity to save (MPS)? Why does MPC + MPS = 1? What is the multiplier? Know how the total expenditures curve is derived from its components: consumption, investment, government expenditures, and net exports. Understand why in the Keynesian Model, we may have an equilibrium at an output level below potential GDP (which corresponds to full employment) and how shifting total expenditures by the shortfall amount (e.g. through government intervention) may help in reaching potential GDP.

11.What are the two components of the federal budget? What do government expenditures consist of? What do tax revenues consist of? What are the different income tax structures: progressive, proportional, and regressive? In a budget deficit, what is greater, expenditures or tax revenues?

In a budget surplus, what is greater? What is a structural deficit vs. a cyclical deficit? What is a value-added tax? How is tax incidence determined (who pays a bigger share of the tax burden)?

In a recessionary gap, which fiscal policy should be implemented: expansionary or contractionary? In an inflationary gap, which fiscal policy should be implemented? Is there a bias towards one policy politically? What is crowding out? How does crowding out affect the loanable funds market? Do lags make fiscal policy more effective or less effective? What is the Laffer curve and what does it suggest about the optimal rate of taxation?

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9 Classical Economics Perspective Says Law Says Law proposed by the classical economist JeanBaptiste Say states that supply creates its own demand In other words the act of producing goods and service... View the full answer