Economics Theories Flashcards

According to Keynesian economics, what is the primary cause of recessions?

Answer: Insufficient aggregate demand

Keynes argued that recessions result from a shortfall in total spending (aggregate demand) in the economy.

The Laffer Curve illustrates the relationship between tax rates and:

Answer: Tax revenue collected

The Laffer Curve shows that both very low and very high tax rates generate less revenue, with a peak somewhere in between.

Which theory argues that wages are 'sticky downward,' making unemployment worse during downturns?

Answer: Keynesian economics

Keynesian theory holds that nominal wages resist falling, so firms cut jobs instead of wages during recessions.

In public choice theory, the term 'rent-seeking' refers to:

Answer: Firms lobbying government for favorable regulations

Rent-seeking describes using political influence to gain economic advantages rather than creating new wealth.

The permanent income hypothesis, developed by Milton Friedman, predicts that consumers base spending on:

Answer: Expected long-run average income

Friedman argued people smooth consumption over time based on expected lifetime income, not just today's income.

Which economic school of thought holds that only unexpected changes in the money supply affect real output?

Answer: New Classical economics

New Classical economists, building on rational expectations, argue that anticipated policy changes are neutralized by private agents.

The Coase Theorem suggests that externalities can be resolved efficiently without government intervention when:

Answer: Property rights are well-defined and transaction costs are low

Ronald Coase showed that if parties can bargain freely, they will reach the efficient outcome regardless of who holds the property right.