Study Questions For The Final Exam
ECON 272
These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
Topic: The Economic Calculation Debate Between Hayek and Keynes
What was the "economic calculation debate" between Hayek and Keynes all about?
What does "economic calculation" mean?
What are the two types of knowledge Hayek talks about and why does he think government planning of the economy will fail? Relate this to economic calculation.
What was Hayek's answer to the question?
What was Keynes's answer to the question?
What are some theories about why Keynesian ideas won over both the politicians and the academics at the time.
Topic: Keynesian Economics
What are the basic assumptions and premises of Keynesian economics (i.e., short-run economists, markets are chaotic, etc.).
Keynes disagreed with the Classical school on all four cornerstones. The following four questions relate to these disagreements:
Did Keynes believe in Say's Law? Explain.
What two institutions did Keynes say would keep prices and wages from being flexible?
What is savings mostly a function of, according to Keynes? Is investment a function of the interest rate in the short run (according to Keynes) - why or why not?
How did Keynes criticize the equation of exchange?
What are the three types of demand for money (according to Keynes)?
Explain the speculative demand for money.
What is the liquidity trap? Explain how it relates to why Keynes did not want to use monetary policy during the depression.
What did Keynes say was the cause of the Depression? What is the most volatile component of aggregate demand according to Keynes and why (hint: this would include the idea of animal spirits).
What are the components of aggregate demand in the simple Keynesian model?
What is autonomous consumption? Besides autonomous consumption, what did Keynes say consumption was a function of?
Graph the components of aggregate demand and add them up in order to get the AD curve in the 45° model.
Where is equilibrium in the 45° model and why?
What is the Paradox of Thrift theory?
What is the marginal propensity to consume (MPC)? To save (MPS)?
What is the Keynesian multiplier effect and how does it relate to the MPC and MPS?
What fiscal policy did Keynes recommend to combat the high unemployment of the depression and why?
Graph and explain what Keynes wanted to do during the depression. Relate this to the multiplier effect.
Why didn't Keynes recommend a balanced budget during the depression? Graph a balanced budget situation using the 45° model.
What knowledge would Keynesian economic planners have to have to successfully plan the economy in order to achieve full employment?
Why did Keynes want discretionary policy and what does discretionary policy mean?
What is the main issue in the modern debate between the New Keynesians and the New Classical economists? If wages and prices are sticky in the short run -- then what can we expect and what role does government play, according to the Keynesians?
What are the three reasons that we discussed as to why new Keynesians think wages and prices are "sticky"?
What are "efficiency" wages? What are the three theories we discussed as to why a firm might pay "efficiency" wages in order to increase productivity?
Make sure you watched the video - The Boom and Bust with Hayek and Keynes.
Supply Side Economics
What is supply side economics? Why do they focus on incentives? Do they believe in Say's Law?
What is the substitution effect? What is the income effect? Which effect do supply side economists think is more prevalent in the economy?
What is the tax base?
What are the two reasons supply side economists give regarding a tax cut leading to an increase in tax revenue?
What is the theory behind the idea that the relatively rich will end up paying more of the overall tax revenue with an income tax cut?
What is the Laffer curve? Explain it.
What conclusions do the supply side economists reach regarding policy?
Is there any empirical evidence for supply side economics? Explain.
What's the difference between a Keynesian tax cut and a supply-side tax cut? Both might want to cut taxes but Keynesians would do so to increase Aggregate demand -- a supply side economist would do so to increase productivity.
Under what presidential regimes have there been major income tax cuts in the United States?
Topic: Austrian Theory of the Trade Cycle
Who are the "leaders" of the Austrian School?
Why is it called the "Austrian" School?
What are the cornerstones of the Austrian School?
Why are they considered "out of the mainstream" in terms of economics?
What is the difference between Austrian capital theory and mainstream capital theory?
What is the Hayekian triangle? What does it represent?
How does time fit into the triangle?
What are positive time preferences and how do they relate to savings and to interest rates?
Why is savings seen as future consumption to Austrians (and other economists)?
If time preferences decreased and people started saving more -- what would the interest rate do and what would that signal entrepreneurs to do (relate this to a shift in the Hayekian triangle).
What does "mal-investment" mean to an Austrian economist? Why causes it to happen on a large scale?
What does a signal extraction problem mean?
Explain the Austrian theory of the business cycle.
Include in your analysis: the Hayekian triangle and it's meaning as a capital structure (higher order and lower order goods), a shifting of the triangle, a "cluster of errors", time preferences, signal extraction problem, relative price changes, mal-investment (on two levels), re-tooling of the capital structure and what that means. How does the FED factor into all of this? How might fiscal policy also create mal-investment?
What happened in the boom/bust rap video?
Topic: Boom and Bust and the Current Recession
Who are the key players or characters in the creation of the boom/bust?
What role did "managed growth" policies in some parts of the country play in the boom/bust?
What role did Congress play in the boom/bust?
What is the Community Reinvestment Act all about? How did its passage (and amendment) contribute to the boom/bust?
What are Freddie Mac and Fannie Mae and what role did they play in the boom/bust?
What role did the FED play in the boom/bust?
What are adjustable rate mortgages? Why are they riskier than fixed rate mortgages?
What role did the Wall Street firms and their new types of investments (which were?) play in the boom/bust?
Why did the banks have an incentive to offer high risk mortgages? Why did the Wall Street firms have an incentive to package and invest in high risk mortgages? What role did Freddie and Fannie play in this?
What is "crony capitalism" and what role did it play in the boom/bust?
Discuss the mal-investment that took place during the boom that led to the bust.
What is the theory regarding how/why the "bailouts" and stimulus packages by Congress have lengthened the period of retooling, thereby lengthening the recession? Explain.
Sum up this whole explanation of the boom/bust by using the rules - incentives - actions - outcomes model.
THE COMPREHENSIVE QUESTION
If there's one thing I want all of you to remember: if you want a certain outcome to happen (less poverty, lower unemployment, a better environment, whatever) -- people must have an interest in acting for that outcome -- if the rules go against their self interest -- all you will get are unintended outcomes - most of them negative !! Remember - Rules (Institutions) lead to incentives which lead to actions which create the outcomes we see in all societies !
It all goes back to the rules of the game!!
Make sure you go over the homework, the in class exercises, and readings.
It has been fun - have a great
summer!