Microeconomics Study Set 47

Business

Quiz 20 :

Great Debates in Economics: Keynes versus Hayek.

Quiz 20 :

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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According to Keynes the capitalistic economy is prone to fluctuations and is unstable.
The reason for it is the that the private sector decisions are constantly changing and therefore an economy has business cycles of boom and recession.
However in such a situation the government can intervene and bring the economy back to equilibrium, by implementing a fiscal or a monetary policy.
During times of recession the government should increase it spending , as it would lead to increase demand and there will be a rise in prices.
The taxes should be reduced and the interest rates should also be reduced which will increase money supply and then demand as well.
The increase in consumption will lead to increase in income, taking the economy out of the recession.
Increase in demand will stimulate production and increase the incomes of all the factors of production involved in the production process.
It will have a multiplying effect.

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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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According to Keynes savings should not be more than planned investment because it will lead the economy to recession and also into depression.
According to Keynes savings are more than planned investment because investment is less due decline in demand or more investment.
This is not good for the economy.
Savings will be worthwhile only if they are invested or else they are being wasted and of no use.
Savings should equal planned investment.
According to Hayek entrepreneurs continue to invest only when they are sure that there will be a consistent supply of capital over a long period of time and the rates of interest will rise.
According to Hayek savings should be done to invest, in order to take the economy forward rather than print more currency.
If the savings are not invested profitably it will lead the economy into a depression.

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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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