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| Question | Answer |
| Classical Macroeconomics | Idea that markets work well and deliver the best available macroeconomic performance. |
| What are the ideas of Classical Macroeconomics | Aggregate Fluctuations are a natural consequence of expanding economy with rising living standards and gov. intervention hinders allocation of resources. (Markets work well by themselves) |
| Keynesian Macroeconomics | The Market Economy is inherently unstable |
| What are the Ideas of Keynesian Macroeconomics | The market economy requires government intervention to achieve full employment and sustained economic growth |
| What was Keynes theory | Keynes theory was that if consumer spending went down then there would be a recession so gov. spending needed to increase so it would balance out |
| Monetarist Macroeconomics | Idea that Classical view of world is broadly correct |
| What are the ideas of Monetarist Macroeconomics | Classical view is mostly correct but in addition to fluctuations that arise from the normal fluctuations of an expanding economy, fluctuations in the quantity of money generate the business cycle (More money = Expansion V.V.) |
| An example of Monetarist Ideas | The slowdown in growth rate of money causes a slowdown and large decreases quantity of money brought the Depression |
| Today's Consensus | A mix of Classical, Monetarist, Keynesian Macroeconomics. |
| What is the Classical Part of Today's Consensus | The Classical Part tells most of the story for full employment but it does not explain recessions or slumps |
| What is the Keynesian Part of Today's Consensus | When spending is cut and demand for goods go down and plus a decrease in labor demand with the same real wage rate the economy goes into a recession because no one is buying and being hired. The gov. has to pump money and lower taxes |
| What is the Monetarist Part of Today's Consensus | The Monetarist part emphasizes that a contraction in the quantity of money brings higher interest rates and borrowing costs which are a major source of cuts that bring recession. By keeping quantity of money growing and lowering interest rates can restore full employment |
| How Can Monetarist Ideas help economy | By controlling economy with interest rates and quantity of money near PPF you can minimize affect of recession and keep inflation in check |
| Today's Consensus view on long term vs. short term | The long term economic growth is more important than the short term recession because a small slowdown in economic growth will bring huge cost in permanentely lower level of income per person. This is more serious than income loss in a recession. |
| Potential GDP | This is the value of Real GDP when all the economies factors of production are fully employed. |
| Production Function | This shows the relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other production factors remain the same. |
| PF explained | The more real GDP the more labor and labor hours are being employed |
| What happens at the top of PF | Diminishing Returns |
| Diminishing Returns | Each additional hour of labor employed produces less real GDP the longer you go. It happens at top of PF |
| Why do Diminishing Returns happen | The amount of factors of production is fixed so this affects capitol and labor. The more labor you have the less capitol you have for each employee (Less work per worker and less goods made) |
| What are three factors of the Labor Market | 1.Demand For Labor 2. Supply of Labor 3. Labor Market Equilibrium |
| Demand For Labor = (What decision maker) | Firms ( They want to see how many people they can hire at certain wages. Cheaper Better) |
| Quantity of Labor Demanded | A vertical move on Demand curve. Total labor hours that all firms in the economy plan to hire during a given time period at real wage rate |
| Demand for labor | Is a horizontal move of Demand Curve Is the relationship between the quantity of labor demanded and the real wage rate when all other influences on the firms hiring plans remain the same. |
| What happens to Quantity demanded when wage rate is lowered | Quantity demanded is increased and is shown in a downward movement along the Demand Curve |
| Give me an example of Demand for Labor | So when you have a product you have to hire ppl to make it. Ex 10 bottles of coke = 1 hour of labor. So if a company can hire to make more than 10 bottles an hour they will keep hiring and demand will be more. Once you reach hiring that equals 10 bottles companies stop hiring and demand will be less |
| Supply of Labor = (What decision makers) | Households (They decided at what price they're willing to go work) |
| Quantity of Labor Supplied | It's a vertical Movement Is the numbers of hours that all the households in the economy plan to work during a given time period at a given real wage rate. |
| Supply of Labor | It's a Horizontal Move It shows the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same |
| What are the two reasons why Labor supplied increases when real wage rate increases | 1. Hours Per Person 2. Labor Force Participation |
| Hours Per Person | The longer you work the more money you get so people would like to work. But if it gets too high people will want to stop working and use leisure time |
| Labor Force Participation | Most people have productive opportunities outside the labor force and only choose to work if the real wage rate exceeds the value of the productive opportunities. Ex. Productive Oppor. = Baby |
| Factors of Labor Supplied | Taxes and Unemployment Benefits The less taxes more people will want to work because they keep more money. Unemployment the better benefits the longer going to take to find job (decrease in labor supply) and V.V. |
| Labor Market Equilibrium | The Demand and Supply are intersecting. If one goes higher than than thye have to go lower to restore balnce |
| Natural Unemployment Rate | What the the unemployment rate is called at when economy reaches full employment |
| What are the two causes of unemployment | 1. Job Search 2. Job Rationing |
| Job Search | When someone is looking for a job that is acceptable |
| What three things do job search depend on | 1. Demographic Change 2. Unemployment Benefits 3. Structural Change |
| Demographic Change (Job Search) | When there is a boom in population there will be more people than jobs because jobs weren't prepared for the boom. This makes it harder to find jobs and more unemployment. Also V.V. |
| Unemployment Benefits (Job Search) | When you have better unemployment benefits you will take longer to find a suitable job meaning longer unemployment. Also V.V. |
| Structural Change ( Job Search) | When there is structural change the industry lost jobs so you can't go back to industry and you will be unemployed for longer. (V.V) There are also structural booms like Tech Industry that provide more jobs in a new industry. |
| Job Rationing | When the real wage rate is above the full employment equlibrium level. (The real wage rate is above what the wage rate should be at) |
| Efficiency Wage (Job Rationing) | When the wage is above what it should be to promote work (not goof off), loyalty and attract top talent. |
| Union Wage (Job Rationing) | When collective bargaining from a union gets a money wage higher than were it should be because you are unionised and can stop production |
| Minimum Wage (Job Rationing) | Whent he government sets a wage limit that is above where it should be. But the gov. wage can be lower than were the real wage is. |
| What does Job rationing do to unemployment | It increases the natural unemployment rate and the quantity demanded is decreased while the labor supplied increases |
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