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What is inflation?
Summarize it's harmful effect.
- General trend in an increase of prices
- * Lost purchasing power
- * Winners/Losers
- * Cost-push
- * Speculation
Problems with counter cyclical fiscal policy?
- 1. Conflict with political priorities
- 2 Timing lag
- -Data lag
- -Implementation lag
- -Effect lag
- 3. One sided pressures
Why is monopoly considered a market flaw? What are it's harmful effects?
- It is not a competitive market.
- * Price gouge
- * Control output/shortages
- * High price, low quantity
What are common resources?
Explaine the "tragedy of the commons", and why that creates incentives for firms in a market to deplete common resources.
Anything shared by all citizens, owned by all. Everyone uses the resources for free therefore creating the Tragedy of the Commons.
What is a public good?
Summarize the "free rider" problem.
Why does that make it impossible to rely on private firms to provide public goods?
Any government service provided universally to all citizens. Therefore "free rider", makes things non-excludable. People can take the service w/o paying for it.
Explain the difference between nominal GDP & real GDP
- Real- Includes inflation
- Nominal- Does not
Propensity to save
90% income saved- higher for rich
Propensity to consume
90% income immediately respent- higher for poor.
Explain the concept of cost externality.
Make up an example.
- A cost imposed on others outside the firm, not recorded on the books of the firm.
- Ex: Firm pollutes water--> Medical bills
What can cause price instability in a market?
Commodities --> products that have a delayed supply response
Assets --> Debt fueled assets
According to classical economists, how should a market automatically adjust to end a serious recession/depression?
- Price goes down --> Consumers buy more --> Producers offer less --> equilibrium
Explain why the GDP is a poor measure of output and/or well-being.
- * Doesn't measure output well because it skips household output, doesn't count underground economy, and mismeasures government services.
- * Well-being people die of cigarettes all the money spent on medical bills goes to GDP. Bad things look like good things.
What is a recession? Summarize what we lose in a recession.
- 2 consecutive quarters w/ no GDP growth
- * Lost Jobs
- * Lost wages
- * Lost income
Why, according to Keynes, was a market economic unable to "self correct" for a downturn as severe as the Great Depression?
- No ability/willingess to buy.
- Those who were able were too afraid.
What was social darwinism?
How did it serve as a moral defense for the harshest side effects of early captilalist economics?
The strong will survive & the weak will not. Those who don't work as hard will not prosper. Don't blame the market, if it doesn't work, it's "your" problem.
Summarize the economic forces that caused & then worsened the Great Depression.
- * Low income/low demand
- * Stock boom funded supply increase
- * Over-lending on over-valued assets
- * No safety net(No FDIC, No bailout,ect.)