Economic History Essay

agree to Keynes, recessions and financial crises mass be avoided if central banks continue general equilibrium in the cash markets (via financial insurance). It can reduce coin supply by selling bonds. It can summation money supply by buying bonds. This make up-decrease in money supply is a general mechanism utilized by central banks to ensure the lustiness of the financial market. In short, the aim of the policy is to make the prices of financial assets motionless (prevents panic). Keynes, however, argued that monetary policy does not raise the national income. monetary policy only creates an illusion of stinting successfulness. Keynes favored the use of monetary policy in increasing the level of national income because of two major reasons. First, monetary policies argon easier to implement than monetary policies. A government can amplify or decrease its expenditure level depending on the status of the prudence. If an economy is in recession, then the government can increase its level of expenditure. If existing GDP exceeds potential GDP, then a slight decrease in government spending is necessary. rase that the mechanism by which financial policies argon implemented argon often quantifys less sophisticated than that of implementing monetary policies. Second, the effect of monetary policy ar more pronounced than that of monetary policy. An increase in government spending automatically increases the level of national income. B) inform 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 tool for preventing recessions and financial crises.For instance, deflationary fiscal policy would be ineffective if the marginal propensity to consume die hard to increase with respect to the interest come out. Inflation would therefore be a very difficult problem to solve. This instance led Friedman to conclude that fiscal policy is actua lly an scotchal barrier to foster frugal activity. Friedman, however, viewed monetary policy as a mechanism for alter an economy. For example, too much money in an economy would cause prices of goods and services to increase. Too small-minded money in an economy causes a contraction in the GDP.Monetary policies are designed to effectively combat both inflation and deflation, and increase efficiency in the money markets. According to Friedman, the cause of the Great drop-off was not overproduction, but rather the Crash of 1929. The inefficiency of the money market created unbalance in stock prices, which ultimately led to the Crash of 1929. For Friedman, efficiency of money markets is an important de preconditioninant of stinting stability. C) Where do these two economists agree? Where do they disagree? (2 points)Both economists recognized the importance of interest rate adjustments in boosting an economy. For Keynes, interest rate is an important factor in inreasing investment and inspiration level in an economy. For Friedman, interest rate serves as a stabilizing agent in adjusting the prices of financial and non-financial instruments. The two economists however differed on the utmost to which interest rates can be used to boost an economy. Keynes favored a more rigorious reduction in interest rates small-arm Friedman a more conservative approach in interest rate adjustments.There is an new(prenominal) significant disagreement between the two theorists. Friedman spurned the concept of permanent income hypothesis which states that as income increases, the fraction allocated to savings in addition increases. Keynes supported this hypothesis. D) What is your own view on this debate? Explain. (2 points) The use of all fiscal or monetary policy is dependent on economic circumstances. For example, a penury-induced recession can be effectively resolved by fiscal policy while a supply-induced recession can be resolved by monetary policy.No single macroe conomic opening can fully explain or resolve all macroeconomic problems. A) Neoclassical economic theories are based on the assumption that peck are rational. Did Thorstein Veblen have a favorable view of neoclassical economic science? Discuss his views on this issue. (3 points) Thorstein Veblen rejected many of the assumptions of neoclassical political economy. He argued that the term rational is generally vague even from the standpoint of modern economics. understanding is an thinker that excludes behavior which is not based on a heedful calculation of costs and benefits.Veblen argued that rationality itself is a relative idea an idea which is based on economic, political, socio-cultural, and economic factors. Veblen established the idea of conspicuous consumption. According to him, demand is often fueled not only by economic factors alone but also by socio arranged factors. Those man-to-mans belonging to the amphetamine strata of society often engaged in conspicuous cons umption because it enhances status. By conspicuous consumption, Veblen meant a general precedent of artificially increasing demand out of conscious desire to enhance status.Conspicuous consumption is a state where actual consumption greatly exceeds actual needs. B) Consider the articles on behavioural economics at http//myweb. liu. edu/uroy/eco54/histlist/behav-econ/index. html. Read and summarize the main pinch of just about of these articles. (3 points) In the article, How Obama is Using the Science of Change, Grunwald argued that Obama hired some of the top hat 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 swan to find the correct political stance.According to the author Obama won the alternative because he looked like transform, sounded like dislodge and never stopped run for change. But he didnt call for just change in Washington or even just change in the States. From his declarations that change comes from the bottom up to his admonitions about 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.Although his top priorities health care, energy, international peace depended on this change. For Obama, economic prosperity could only be achieved through constant moralistic evaluation of man-to-man conduct. Saving energy, protecting the environment, and promoting a responsible dodging of governance are highly related to individual decisions. C) Based on these articles, what is your credit of the value of the contributions of behavioral economics to economic epitome? Explain. In the past, economic phenomena were whole explained by economic factors.For example, fluctuations in GDP were generally explained by variable levels in consumption, investment, trade accounts, and government exp enditure. Efficiency in money and gravid 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 show that some non-economic factors influenced, sometimes, determined economic phenomena.For example, the failure of capitalist reforms in Latin America during the 1970s was attributed solely to political instability. Becker, for instance, proved that individual reaction to income and levy changes affect the overall labor supply in an economy. In his time allocation model, Becker posited the hypothesis that individual behavior directly influence total income. D) Do you think behavioral economics represents a return of Veblens ideas? (2 points) Behavioral economics whitethorn be thought as a return to Veblens ideas.Behavioral economi cs has the following assumptions which reflected Veblens ideas 1) case-by-case decision-making patterns influence economic decision making in the public topic of operations 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 most of Veblens ideas tackled non-economic issues, so it is impossible to bust that behavioral economics is a determined return to Veblens ideas.A) To what extent has economics benefited from the application of numerical methods in the analysis of economic issues? (2 points) The application of numerical methods benefited economics in the analysis of economic issues in three respects. First, mathematical methods allowed the construction of elaborate and sophisticated models in explaining economic phenomena. Sec ond, these models greatly intensify the means by which prediction is utilized. Many of the models used were helpful in assessing economic trends, and in general, in determining future consumption, investment, and public figure levels.Third, these methods provided economists egg, logical reference points. It is very difficult for an economist to analyze an economic phenomenon without the proper guidance from opening (it is very probable for an economist unguided by theory to draw misleading 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).Standard equilibrium analyses deport all players 1) all forms of belief based on analysis of what other may do (this is called strategic thinkin g) 2) choose a best answer given those beliefs (optimization) 3) adjust best responses and beliefs until they are mutually consistent (equilibrium). bet on theory, unlike the nomothetic macroeconomic theories, assumes that not all players behave rationally in complex situations. Assumtions (1) and (2) are violated, or more absolutely relaxed. Players luck are intertwined. The presence of players who do not think strategically or optimize can change what rational player will do.As a result, the standard 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 supplementary perceptiveness in economic analysis of actor units. Game theory may provide vivid differentiation between collective and individual action. Note that sometimes, there is discrepancy betwee n collective and individual action (which is not shown in standard microeconomic analysis).C) 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 econometrics. He used complex fixation systems to predict specific economic phenomena like business cycles and GDP fluctuations, and to determine optimal tax and want levels of public goods.In 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 through empirical observation verified. D) Comment on Paul Krugmans article Two Cheers for sanctimony which is available at his web page http//web. mit. edu/krugman/www/.It is much safer to assume that formalist economics is still useful in analyzing economic events. The reason is evident. overmuch of economic theorizing are essentially based on logical analysis of economic precedents which altogether comprised what is called models the physical representation of reality. Many of Krugmans assumptions are essentially based on whimsical spin 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.In any case, there is no sense in arguing that a new economics is indispensable to explain current trends in the world economy, for economic theories, at the present, can explain those trends.ReferencesCamerer, Colin. 2001. Behavioral Game Theory Thi nking, Learning, and Teaching. California 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 lexicon of Economics.