by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
Why are Prices are Flexible in the Long Run? How does the macroeconomy adjust back to its level of potential GDP in the long run? What if aggregate demand increases or decreases? Economists base the neoclassical view of how the macroeconomy adjusts on the insight that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Potential GDP affect the Aggregate Demand Aggregate Supply Model? In the aggregate demand/aggregate supply model, we show potential GDP as a vertical line. Neoclassical economists who focus on potential GDP as the primary determinant of real GDP argue that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Physical Capital Affect Productivity? Physical capital per person refers to the amount and kind of machinery and equipment available to help people get work done. Compare, for example, your productivity in typing a term paper on a typewriter to working on...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Keynesian Perspective on Market Forces? Ever since the birth of Keynesian economics in the 1930s, controversy has simmered over the extent to which government should play an active role in managing the economy. In the aftermath of the human devastation and...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Keynesian Approach to Unemployment and Inflation? Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Expenditure Multiplier? A key concept in Keynesian economics is the expenditure multiplier. The expenditure multiplier is the idea that not only does spending affect the equilibrium level of GDP, but that spending is powerful. More precisely, it means that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is a Macroeconomic Externality? A macroeconomic externality is where what happens at the macro level is different from and inferior to what happens at the micro level. For example, a firm should respond to a decrease in demand for its product by cutting its...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are the Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model? The AD/AS diagram illustrates two Keynesian assumptions—the importance of aggregate demand in causing recession and the stickiness of wages and prices. Note that because of the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are Menu Costs? These costs of changing prices are called menu costs—like the costs of printing a new set of menus with different prices in a restaurant. Prices do respond to forces of supply and demand, but from a macroeconomic perspective, the process of...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Coordination Argument of Wage Stickiness?Keynes emphasized one particular reason why wages were sticky: the coordination argument. This argument points out that, even if most people would be willing—at least hypothetically—to see a decline in their own...
