Economics Study Set 20

Business

Quiz 32 :
Great Debates in Economics: Keynes versus Hayek.

Quiz 32 :
Great Debates in Economics: Keynes versus Hayek.

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What is the underlying message of the following lyrics from Keynes? [Keynes] Public works, digging ditches, war has the same effect. Even a broken window helps the glass man have some wealth. The multiplier driving higher the economy's health.
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With the increase in housing prices lot of housing projects will be underway hence demand for plumbers, electrician etc will increase. As a result their wages would increase.

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Use the following lyrics to describe the difference between Keynes and Hayek on the role of savings in the economy. [Keynes] So forget about saving, get it straight out of your head. Like I said, in the long run-we're all dead. Savings is destruction, that's the paradox of thrift. Don't keep money in your pocket, or that growth will never lift. [Hayek] Real savings come first if you want to invest. The market coordinates time with interest. Your focus on spending is pushing on thread. In the long run, my friend, it's your theory that's dead. Whether it's the late twenties or two thousand and five Booming bad investments, seems like they'd thrive. You must save to invest, don't use the printing press Or a bust will surely follow, an economy depressed.
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Keynes and Hayek have opposite views with regards to role of savings in the economy.
Keynes considered savings bad for the economy and points towards the paradox of thrift. Paradox of thrift brings out the adverse impact of savings on economy. As we know that one person's consumption spending is income of another person.
If each person out of income received saves a portion and spends rest, consumption at each stage will goes on declining and with that income will also decline.
Pointing to similar scenario, Keynes argued that savings adversely impact the aggregate demand and thus the economic growth and if a society wants economic growth all income should be spend.
Moreover, this view of Keynes was also due to his pre-occupation with only short-run as he believes there is no such thing like long-run.
On the other hand, Hayek considered saving good for the economy and points towards the fact if solely wants to invest it needs savings to finance it.
He argued that in short-run, if country focuses solely on consumption and does not undertake ample savings then in that case in long-run required level of savings to fiancé investment in new productive capital as well as replacement of assets does not materialize prompting a society or country to finance such investment through printing of more currency which will only adversely impact the economy and is sure shot invite to depression.
Thus, saving is important for rapid and stable economic growth.

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The following lyrics discuss whether the government stimulus efforts in response to the 2008 financial crisis worked and also argue points about government policy during the Great Depression and the subsequent recovery. What are the major areas of disagreement on these issues as illustrated in the lyrics? [Keynes] Are you kidding? My cure works perfectly fine. Have a look. The recession ended in '09. I deserve credit. Things would have been worse. All the estimates prove it. I'll go chapter and verse. We could have done better if we'd only spent more. Too bad that only happens when there's a world war. You can carp all you want about stats and regression. Do you deny that world war cut short the Depression? [Hayek] Wow. One data point and you're jumping for joy. The last time I checked wars only destroy. There was no multiplier. Consumption just shrank As we used scarce resources for every new tank. Pretty perverse to call that prosperity. Ration meat. Ration butter. A life of austerity. When that war spending ended, your friends cried disaster. Yet the economy thrived and grew faster. Creating employment is a straightforward craft When the nation's at war and there's a draft. If every worker were staffed in the army and fleet We'd have full employment and nothing to eat. Jobs are a means, not the end in themselves. People work to live better, to put food on the shelves. Real growth means production of what people demand. That's entrepreneurship, not your central plan.
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The following lyrics discuss the appropriateness of the government bailouts in response to the 2008 financial crisis. Explain why Keynesians generally support these policies while Hayekians do not. [Hayek] And yet it continues as a justification For bailouts and payoffs by pols with machi nations. You provide them with cover to sell us a free lunch, Then all that we're left with is debt, and a bunch. If you're living high on that cheap credit hog Don't look for cure from the hair of the dog. Let's not repeat what created our troubles. I want real growth not a series of bubbles. Stop bailing out losers, let prices work. If we don't try to steer them they won't go berserk.
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