Case 1 Macro: Introduction to Macro-Economics: The Big Picture - Essay Example

He stated that the end of laissez faire do not indicate the rise of communism. Keynes was not in line with the proposal laid by Hayek in his Road to Serfdom. He accused Hayek on the basis of his short period theory. Hayek accused Keynes on the ground on his blurred long term consequences of some of the proposals of Keynes. Keynes could make out that collective expectations have entered into the valuations of individuals and the government can influence that by controlling aggregates. According to Keynes, the government can manage the spending power o the individuals only roughly.

In road to Serfdom Hayek accused the central planning as it according to him was retrogressive. Hayek was the firm believer of government that would establish economic liberalism. After the death of Keynes, Hayek stated that by destroying the regulation which limited government intervention a hubristic type of Keynesianism can be ensured. Question 2 Answer: The amount of currency or paper notes issued by the government seems to have no effect on the productivity of the economy. Therefore the velocity of money lacks the capability to influence the capacity.

According to the law of supply the quantities of goods as well as services supplied will rise in line with the market prices. The classical economists would disregard the fact that the output of the nation rises with rises in the prices. The new classical theorists suggest that the economy operates under perfect competition. But in the real world almost all industries operate under imperfect competition. Increasing marginal cost conditions in the short run can be an unlikely situation for the individual firms.

It is easier for the producers for military equipments to raise the prices during the war than the entertainment producers on the simple ground of cultural environment at the time. Therefore it will be unwise to take menu costs only as direct costs arising from changes in prices. In order to deal with inflation the central bank contracts the supply of money and the immediate resultant is unemployment. The level of high unemployment will cause money to deflate. The economic activity will adjust to the new flow of money.

Question 3 Answer: Suppose the income as well as the value of assets of someone doubles. Now again the prices of the necessities that the person under consideration buys along with the amount of debts also doubles. Such a situation will not change the behavior of the person. Therefore classical economists conclude that the behavior of the market remains unaffected by the changes in level of prices. Relative prices can reshape the economic behavior. According to the neo classical theorist the firms face increasing marginal cost curve in the short run.

If a contractor employs 5 people with spades to dug out a canal the involvement of the 6th person will split the already existing 5 spades into 6 smaller spades. The new Keynesian theorists supports in moderate interventions from the government only in case of necessities. The stimulus plan adopted by Obama Government is an application of new Keynesian theory. During the regime of President Clinton, there was a deliberate policy of reduction in both short term and long term interest rates. Under the Chairmanship of Paul Volker in the Federal Reserve System the country was witnessing a period of high inflation.

To cope up with the situation the Chairman increased the rates of interest and the economy was caught under the vicious circle of recession.