'Economic History Essay\r'

'harmonize to Keynes, recessions and financial crises end be avoided if central banks confine general equilibrium in the currency market places (via financial form _or_ transcription of government). It washbowl reduce m unrivalledy lend by selling bonds. It fundament emergence money add together by buying bonds. This add- diminution in money supply is a general mechanism utilized by central banks to ensure the robustness of the financial market. In short, the aim of the insurance insurance is to make the prices of financial assets perpetual (pr plaints panic). Keynes, however, argued that monetary policy does not raise the bailiwick income.\r\n financial policy only creates an ‘illusion’ of frugalal prosperity. Keynes favored the expenditure of pecuniary policy in increasing the aim of national income be courtship of 2 major(ip) drives. First, financial policies argon easier to implement than monetary policies. A politics can increase or decreas e its expenditure take aim depending on the status of the rescue. If an economy is in recession, thus the government can increase its level of expenditure. If actual gross domestic product exceeds potential GDP, then a slight decrease in government spending is necessary.\r\n disgrace that the mechanism by which fiscal policies atomic number 18 implemented atomic number 18 much less(prenominal) sophisticated than that of implementing monetary policies. Second, the effects of fiscal policy ar more ‘pronounced’ than that of monetary policy. An increase in government spending automatic in all(a)y increases the level of national income. B) Explain what Friedman thought were the pros and cons of the active use of fiscal policy and of monetary policy. (3 points) Friedman argued that fiscal policy is not an effective alsol for preventing recessions and financial crises.\r\nFor instance, deflationary fiscal policy would be ineffective if the fringy propensity to consume tend to increase with prize to the vex rate. Inflation would in that respectfore be a actually difficult problem to solve. This instance guide Friedman to conclude that fiscal policy is actually an scotch barrier to foster sparing activity. Friedman, however, viewed monetary policy as a mechanism for stabilizing an economy. For example, too much money in an economy would cause prices of goods and services to increase. Too little money in an economy causes a contraction in the GDP.\r\nMonetary policies ar designed to effectively combat round(prenominal) inflation and deflation, and increase efficiency in the money markets. fit to Friedman, the cause of the Great Depression was not overproduction, but rather the Crash of 1929. The inefficiency of the money market created instability in stock prices, which ultimately light-emitting diode to the Crash of 1929. For Friedman, efficiency of money markets is an principal(prenominal) causal f sham of scotch stability. C) Where do these dickens economic experts agree? Where do they disagree? (2 points)\r\nBoth economists recognized the importance of take rate sicments in boosting an economy. For Keynes, following rate is an important factor in inreasing investment and consumption level in an economy. For Friedman, come to rate serves as a stabilizing agent in adjusting the prices of financial and non-financial instruments. The two economists however differed on the extent to which interest range can be utilise to boost an economy. Keynes preferent a more rigorious reduction in interest rates while Friedman a more hidebound memory access in interest rate adjustments.\r\n in that location is another significant disagreement between the two theorists. Friedman rejected the concept of permanent income hypothesis which evinces that as income increases, the fraction allocated to savings also increases. Keynes supported this hypothesis. D) What is your induce view on this debate? Explain. (2 points) The use of any fiscal or monetary policy is low-level on economic circumstances. For example, a get-induced recession can be effectively resolved by fiscal policy while a supply-induced recession can be resolved by monetary policy.\r\nNo single macroeconomic scheme can fully explain or resolve all macroeconomic problems. A) Neoclassical economic theories are ground on the assumption that people are acute. Did Thorstein Veblen have a favorable view of neoclassical political economy? argue his views on this issue. (3 points) Thorstein Veblen rejected legion(predicate) of the assumptions of neoclassical political economy. He argued that the term ‘rational’ is generally vague even from the standpoint of modern economics. Rationality is an idea that excludes deportment which is not base on a mensural calculation of costs and benefits.\r\nVeblen argued that rationality itself is a coitus idea; an idea which is based on economic, political, socio-cultural, and eco nomic factors. Veblen established the idea of ‘conspicuous consumption. ‘ According to him, demand is a great deal fueled not only by economic factors alone but also by sociological factors. Those souls belonging to the upper strata of society often engaged in conspicuous consumption because it enhances status. By conspicuous consumption, Veblen meant a general precedent of unnaturally increasing demand out of conscious thirst to enhance status.\r\nConspicuous consumption is a state where actual consumption greatly exceeds actual needs. B) meet the conditions on behavioural economics at http://my web. liu. edu/~uroy/eco54/histlist/behav-econ/index. html. realise and summarize the main thrust of some of these articles. (3 points) In the article, â€Å"How Obama is Using the scholarship of Change,” Grunwald argued that Obama hired some of the surpass professors in behavioral science to help him in his campaign. This so-called ‘behavioral team’ assisted Obama in evaluating the behavioral instance of the voters, in order to divulge the correct political stance.\r\nAccording to the author: â€Å"Obama win the election because he looked like swop, sounded like transplant and never stopped campaigning for change. But he didn’t call for just change in Washington †or even just change in America. From his declarations that ‘change comes from the bottom up’ to his admonitions somewhat ‘an era of profound irresponsibility,’ Obama called for change in Americans” (Grunwald, 2009). According to the author, Obama relied his presidency on the ability of every American to change behavior.\r\nAlthough his top priorities †health care, energy, international heartsease †depended on this change. For Obama, economic prosperity could only be achieved through constant moralistic evaluation of several(prenominal) conduct. Saving energy, protecting the environment, and promoting a respon sible system of governance are highly related to various(prenominal) decisions. C) Based on these articles, what is your opinion of the nourish of the contributions of behavioral economics to economic synopsis? Explain. In the past, economic phenomena were merely explained by economic factors.\r\nFor example, fluctuations in GDP were generally explained by varying levels in consumption, investment, deal out accounts, and government expenditure. Efficiency in money and dandy markets were solely explained by confidence levels, risk based assets and liabilities, and in general, federal funds rate. Today, there is a growing interest in associating economic phenomena with non-economic factors. This interest is not without basis. Some economists, notably Hayek and Kuznets, were able to pose that some non-economic factors influenced, sometimes, determined economic phenomena.\r\nFor example, the failure of capitalist reforms in Latin America during the 1970s was attributed solely to political instability. Becker, for instance, proved that case-by-case reaction to income and measure changes affect the overall labor supply in an economy. In his time allocation model, Becker posited the hypothesis that individual behavior directly influence aggregate income. D) Do you think behavioral economics represents a output of Veblen’s ideas? (2 points) Behavioral economics may be thought as a return to Veblen’s ideas.\r\nBehavioral economics has the following assumptions which reflected Veblen’s ideas: 1) idiosyncratic decision-making patterns influence economic decision making in the public sphere; 2) Individual behavior is influenced by the behavior of other individuals; 3) Economic phenomena are sometimes directly influenced by actions of institutions; 4) And, consumption and investment are not solely determined by interest rate and confidence levels respectively. It should, however, be noted that around of Veblen’s ideas tackled non-e conomic issues, so it is impossible to assume that behavioral economics is a determined return to Veblen’s ideas.\r\nA) To what extent has economics benefited from the application of mathematical methods in the analysis of economic issues? (2 points) The application of mathematical methods benefited economics in the analysis of economic issues in one-third respects. First, mathematical methods allowed the construction of elaborate and sophisticated models in explaining economic phenomena. Second, these models greatly enhanced the means by which prevision is utilized. Many of the models used were helpful in assessing economic trends, and in general, in determining incoming consumption, investment, and public budget levels.\r\nThird, these methods provided economists formal, logical reference points. It is very difficult for an economist to analyze an economic phenomenon without the straightlaced guidance from theory (it is very probable for an economist unguided by theory to draw deceptive and sometimes, false conclusions). B) What is game theory? Discuss some of its contributions to economic analysis. What is your opinion of the value of the contributions of game theory to economic analysis? (3 points) Generally, game theory is a mathematical system for analyzing and predicting how humans behave in strategic situations (Camerer, 2001).\r\nStandard equilibrium analyses assume all players: 1) all forms of belief based on analysis of what other may do (this is called strategic thinking); 2) engage a best response given those beliefs (optimization); 3) adjust best responses and beliefs until they are mutually consistent (equilibrium). racy theory, unlike the ‘nomothetic’ macroeconomic theories, assumes that not all players behave rationally in complex situations. Assumtions (1) and (2) are violated, or more accurately relaxed. Players’ fate are intertwined. The presence of players who do not think strategically or optimize can cha nge what rational player will do.\r\nAs a result, the measuring rod way of predicting individual behavior often becomes invalid. At best, game theory offers a new approach in analyzing individual behavior. It relaxes the concept of rationality. This is desirable because individual often act irrationally in many circumstances. Game theory may provide adjunct insight in economic analysis of actor units. Game theory may provide undimmed differentiation between collective and individual action. Note that sometimes, there is discrepancy between collective and individual action (which is not shown in standard microeconomic analysis).\r\nC) What is econometrics? Discuss some of its contributions to economic analysis. What is your opinion of the value of the contributions of econometrics to economic analysis? (3 points) Econometrics is the use of statistical tools in formal economic analysis (Garcia, 2004). Paul Samuelson was one of the first economists who developed the field of econome trics. He used complex regression systems to predict specific economic phenomena like business cycles and GDP fluctuations, and to determine best tax and desired levels of public goods.\r\nIn general, the contributions of econometrics to economic analysis are as follows: 1) accurate prediction systems, 2) precise determination of specific contribution of economic factors (in regression anaysis), and 3) determination of direction of economic trends. At best, econometrics is used to confirm or dispove economic theories. It is a means by which theories can be empirically verified. D) Comment on Paul Krugman’s article â€Å"Two Cheers for Formalism” which is available at his web page http://web. mit. edu/krugman/www/.\r\nIt is much safer to assume that formalist economics is still useful in analyzing economic events. The reason is evident. Much of economic theorizing are essentially based on logical analysis of economic precedents which all told comprised what is called ‘models’ †the physical representation of reality. Many of Krugman’s assumptions are essentially based on whimsical twisting of economic facts. This distortion is evident. Krugman treated theory as if it was based on pure logical thinking. For the most, theories are partially constructed from actual observations.\r\nIn any case, there is no sense in arguing that a new economics is needed to explain flowing trends in the world economy, for economic theories, at the present, can explain those trends.\r\nReferences\r\nCamerer, Colin. 2001. Behavioral Game Theory: Thinking, Learning, and Teaching. atomic number 20: California Institute of Technology. Garcia. Yolanda. 2004. Lectures in Econometrics. Universit of the Philippines. Grunwald, Michael. 2009. How Obama is Using the Science of Change. Retrieved on April 25, 2009 from http://myweb. liu. edu/~uroy/eco54/histlist/behav-econ/index. html The New Palgrave Dictionary of Economics.\r\n'