Question

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?

Answer 1

I will answer only question No 9) as per HomeworkLib policy. Kindly accept Chegg policy.

According to Say's law production creates demand.Production of a commodity creates demand for another commodity by making a product which can be exchanged for the other product.In simple language supply creates its demand.

According to Classical economists interest rate , prices and wages should be flexible.They believe that price in the market will adjust to demand and supply.The market being self regulatory intervention is not required and the forces of demand and supply determine prices.

Three states of the economy are firstly,Real GDP is less than natural GDP and there is recessionary gap in the economy.Secondly Real GDP is more than natural GDP and there is inflationary gap in the economy. Thirdly real GDP is equal to natural GDP and there is long run equilibrium in the economy.

In a recessionary gap there is shortage of production.

A recessionary gap is a state of the economy operating below full employment level and the gap closes down when wages return to equilibrium ie quantity demanded of labor is equal to quantity supplied.

A recessionary gap refers to a situation when actual GDP is less than potential GDP .An inflationary gap refers o a situation when actual GDP is more than potential GDP and long run equilibrium refers to a situation when actual GDP is equal to potential GDP.

Physical PPF shows different combinations of goods society can produce with certain constraints like finite resources and level of technology which is not advanced .Institutional PPF means the different combination of goods that society can produce with finite resources,technology which is not advanced and minimum wages.

Institutional PPF is close to the origin because they are not always equally effective like inflation which may reduce real minimum wage.

Wages play an important role in self regulating economy and can close recessionary gap and inflationary gap.During recessionary gap real GDP is less than natural real GDP and at the same time unemployment rate is more than natural unemployment rate and so wage rates may fall.

Laissez faire means no government intervention and the economy is strong when the government only protects the rights of individuals and do not interfere in the functioning of the market and allows the market to do its own thing.