uestion 1: How can governments influence the long run rate at which the economy grows?
Question 2: … or do governments have little power to affect long run performance?
Fiscal policy: Managing Aggregate Demand
Question 1: Keynesian economics is often viewed as justifying increases in deficit spending by the
government to stimulate real economic activity. How does this proposal relate to Keynes own writing
reproduced in the case?
Question 2: What role do confidence and psychology play in Keynes understanding of the economy
and the role of government?
Question 3: Why is Keynes so concerned with uncertainty?
Question 4: Explain intuitively the mechanism by which an increase in government spending can lead
to more output.
Question 5: Is it reasonable to assume that firms will supply more output when consumers and the
government demand to purchase it?
Question 6: Read the following from the Washington Post, 1 August 2003:
The economy continued to lose jobs during the 2nd quarter, as the jobless rate
rose to a nine-year high of 6.4 percent in June. But the Labor Department
reported yesterday that the number of people filing initial claims for
unemployment benefits declined again last week, a possible signal that the
lackluster U.S. labor market is beginning to improve, analysts said. The
government’s July employment figures will be released today.
Democrats have increasingly complained that President Bush’s economic policies,
which have centered on income tax cuts for individuals and businesses, have
done little to help the more than 9 million unemployed workers.
The Bush administration welcomed the economic reports yesterday.
“Today’s announcement . . . indicates that our economy is clearly moving in the
right direction,” Commerce Secretary Donald L. Evans said in a statement. “The
president’s tax cut is beginning to work its way into the economy, and the stock
market continues to reflect the confidence that investors have in the short-term
economic outlook. Today’s report also shows increased business investment
during this past spring and provides some welcome news to Americans looking for
work this summer and fall.”
Is the above article consistent with the predictions of the Keynesian theory?The Central Bank and Inflation
Question: Read the following from the Washington Post, June 27, 2003:
“Some Federal Reserve officials believed in early May that they might need to cut interest
rates again to spur stronger U.S. economic growth but decided to wait because the recently
ended war in Iraq had clouded the economic picture. At the same time, some officials made
clear at their May 6 policymaking meeting that they would not wait indefinitely for the
clouds to clear before lowering rates again in response to falling inflation rates and sluggish
economic growth, according to minutes of the meeting released yesterday.”
What does the above article suggest that the Federal is trying to achieve?
The Blair Wealth Project: Antecedents and Prospects
Question 1: What were the causes of Britain’s “stop-go” economy? Did Mrs. Thatcher address them
Question 2: What is the difference – if any – between “stop-go” in the 1950s and ’60s and what
Gordon Brown, New Labour’s Chancellor of the Exchequer (i.e., Finance Minister) has called “twenty
years of Tory boom and bust” under Mrs. Thatcher and her Conservative successors?
Question 3: Do you believe that the policies implemented by Blair’s New Labour government will finally
abolish macroeconomic instability in the U.K.? What role – if any – would adoption of the Euro play in
containing such instability?
Inequality and the ‘American Model’
Question 1: Which is of greater concern: poverty of inequality? Should we be concerned with rising
inequality in the United States?
Question 2: How should business respond to inequality? Does it create business opportunities?
Question 3: What are the causes of inequality in the United States?
Question 4: What policy responses are appropriate? Can the United States learn from the experienceof other countries discussed in this course? If so, what lessons should it draw?
Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency
Question: How would you compare the NZ reforms of the 1980s to the Thatcher reforms in the UK that
occurred around the same time?Mexico: The Tequila Crisis 1994-1995
Question 1: What is your answer to the question posed by the Banco de Mexico officials on page 1 of
the case: ‘How could extensive and well-executed fiscal, supply-side and trade reforms end up in such a
Question 2: What best explains the collapse of the Mexican currency: psychological factors
(expectations and confidence) or fundamental factors (economic phenomena such as current account
and fiscal deficits)?
Question 3: Should Mexico be “bailed out” by the international community? How does your answer to
this question relate to your position on questions 1 and 2 above?
Question 4: Is Paul Krugman’s analogy between the Mexican crisis and the “irrational exuberance”
usually associated with tulipmania a good one?
Sub-prime Meltdown: American Housing and Global Financial Turmoil
Question 1: Who was to blame for the Sub-Prime Crisis in the US and the Global Financial
Turmoil experienced in 2008?
Question 2: What can Policy Makers do to prevent another meltdown like the one suffered in 2008?
- Keynesian economics is often viewed as justifying increases in deficit spending … How does this proposal related to Keynes own writing?2. What role do confidence and psychology play in Keynes understanding of the economy
and role of government?
You should emphasize the quote of Keynes that he believed that the Great Depression
“comes from some failure of the material devices of the mind”. And quote the examples
of speculative stock market booms and busts that concerned Keynes.
The key issue is that lack of confidence and uncertainty about the future may lead
business to stop investing and consumers to stop spending which may bring on a slump.
So psychology plays an important role.
- Why is Keynes so concerned with uncertainty?
- Explain intuitively the mechanism by which an increase in government spending can
lead to more output.
This is discussed in the case: ‘Fiscal Policy, Managing Aggregate Demand’ and in our
discussions of the multiplier. The key equations are Y = C + I + G which explains how
higher G has a direct effect on creating more demand and leading to higher Y. The other
key equation is C = a + cY which says that when Y goes up, there is an extra effect
whereby consumption demand goes up which further raises Y and so on (i.e., the
- Is it reasonable to assume that firms will supply more output when consumers and the
government demand to purchase it?
You must emphasize the concept of the ‘Output Gap’ here. If actual output is greater than
potential output then firms will be depleting stocks so that more demand is eventually
going to push up prices/cause inflation (and not lead to more output). Only if actual
output is less than potential output will firms have spare productive capacity to supply
more when there is more demand from the government or consumers.
The Central Bank and Inflation
- What revealed objectives do the actions of the Fed suggest that it is following with
respect to its conduct of monetary policy?
I think the best answer would include a reference to the Taylor Rule that we discussed in
class (see also Mankiw’s discussion of it in his essay on US monetary policy in the
1990s). The idea is that the Taylor rule does a good job of explaining how interest rates
were changed: they were lowered when unemployment went up to help stabilize the
economy and raised whenever inflation started going up to help avoid more inflation (by So the revealed objectives appear to be that it is trying to achieve low and stable inflation
and also avoid recessions when unemployment starts to rise.
- Do you believe that the US Federal Reserve is independent? Has it been influenced by
The question is about whether the US Fed has set interest rates to help satisfy political
objectives (e.g., to win elections) or whether they have solely been aimed at fighting inflation / stabilizing the economy. Are the costs of falling prices the same as the costs of rising prices? Why may they
differ?4. Should so much power be given to unelected central bankers like Greenspan?
One of the main points here is that giving lots of power to unelected central bankers may
be good since then they have independence from politicians and the need to win
elections. That can result in monetary policy aimed more at keeping inflation low than
trying to boost the economy even when actual output equals potential output. However
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