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Quiz 10 :
The Financial Sector and the Economy

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Quiz 10 :
The Financial Sector and the Economy

Aggregate demand is equal to the overall demand of goods and services in an economy. Aggregate demand curve shows the relationship between the real GDP and price-level. Aggregate supply is equal to the overall production of goods and services in an economy. Aggregate supply curve shows the relationship between the real GDP and price-level. The intersection of AD curve and AS curve gives the equilibrium level of economy. a.In the opening quote of the chapter, Keynes tries to tell that the theories in economics are not absolute and final, and they are just a medium to understand and analysis the economic activities and try to understand the reasons behind that. b.Economics is governed by large number of variables at any point of time. Now, these theories which are explained in economics change or variate only few variables at a time to understand the effect and inter-relationships of these variables, and so other things are kept constant. c.The quote of Keynes proves that he was interested in studying economics theories as arts of economics, because as per him these theories only help in understanding and help in formulating further thinking.

Classical theory believing economists, believe that the economy should not have any intervention and economy with the help of price mechanism corrects itself. While Keynesian economist believe that proper intervention by authorities is needed to steer the economy at time of problems. a.The explanation given by the Austrian economist is that government intervention is responsible for the recession transforming into Great Depression is consistent with the aggregate demand supply model. Rational expectations are an integral part of the model and the policies used by the government hit both consumers as well as suppliers which had made problem worse.b.People who agree with the Austrian economist would say that government intervention should not had been there, and the free market should had been given the utmost importance and then it would had solved the problem of recession much faster.

Here, as you know that, the Laisez-faire means leave the market alone. A Laisez faire economist follows the policy of let the market forces of demand and supply regulates the price mechanism. Classical economists believed that the market has the ability to be self-regulating through the invisible hand.An activist economist is one who believes in the government action. The activist economist like JM Keynes believed that government intervention is necessary during the times of recession. A Laisez faire economist is more of a non-activist and observes the market interactions only. An activist economist wants the intervention to change the short run economic conditions. According to activist economist JM Keynes, if we do not do anything in the short run to improve conditions, we will not have suitable