classical economics
used to refer to an era in the history of economic thought that stretched from 1750-early 1900s. believed in Say's law, that markets are competitive, and that prices and wages are flexible and they adjust in response to shortages and surpluses
Say's law
supply creates its own demand. as long as producers produce stuff, consumers consume it. as long as we supply, there will always be demand
recessionary gap
Real GDP is less than natural real GDP. the condition where the Real GDP the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate
inflationary gap
real GDP is greater than natural real GDP. the condition where the Real GDP the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate
long-run equilibrium
real GDP is equal to natural real GDP. The condition where the real GDP the economy is producing is equal to the Natural Real GDP and the unemployment rate is equal to the natural unemployment rate
self-regulating economy
our economy is ______, meaning we don't need help from the government. it can close the recessionary gap
recessionary gap 2
wages fall and SRAS curve shifts to the right until Real GDP = Natural Real GDP
inflationary gap 2
wages rise and SRAS curve shifts to the left until Real GDP = Natural Real GDP
long-run equilibrium 2
no change in wages and no change in SRAS
laissez-faire
a public policy of not interfering with market activities in the economy. classical economics agree
economic growth
______ is represented by rightward shifts in the long-run aggregate supply curve LRAS