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Economics 201 Ch 7

Principles of Economics Ch 7

QuestionAnswer
Classical Economic Theory The theory introduced by Scottish economist Adam Smith in the latter half of the 18th century
Adam Smith's most famous book. An Inquiry into Nature and Causes of the Wealth of Nations. Publish in 1776. Also known as "The Wealth of Nations."
Besides Adam Smith, the other economists that contributed to the development of classical economic theory. David Ricardo, Jean-Baptiste, and John Stuart Mill.
The ideal quantity of total output. The quantity that will yield full employment.
Recessionary Gap Real GDP is less than Natural Real GDP. During the trough phase of the business cycle, the unemployment rate may be higher than the natural unemployment rate.
Inflationary Gap Real GDP is greater than Natura Real GDP. During the peak phase of the business cycle, the unemployment rate may be lower than the natural unemployment rate.
According to classical economic theory: A market economy is self regulating and will automatically adjust to Natura Real GDP. Deviations from full employment are temporary and self correcting.
Karl Marx The most famous 19th century critic of classical theory and market economies (capitalism).
According to Marx Workers in a market economy would be exploited
Surplus Labor Value The difference of what the capitalists would pay their workers and the value of the worker's output.
According to Marx, the exploitation of labor would mean: Income would be distributed very unequally in a market economy.
Say's Law Supply creates its own demand.
Flexible interest rates in the credit market cause: Any consumer savings to be exactly offset by business investment.
The Investment Demand Curve Is downward sloping.
The Savings Supply Curve Is upward sloping.
The actual interest rate will be: The equilibrium rate.
Any surplus or shortages in the labor market will be: Eliminated by wages and price adjustments.
Long-Run Equilibrium The Real GDP is equal to Natural Real GDP.
Laissez-faire Do nothing, leave it alone, do not interfere with the economy.
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