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ECONOMICS, Keynesian theories
ECONOMICS, Keynesian theories
Keynesian economics is the view of the economy where in the short-run, especially during recessions the economic output is strongly influenced by total spending of the economy, also known as aggregate demand. Classical economics on the other hand is defined to be, the study of market dynamics; describes the way markets and market economies work. Classical economics is concerned with changes in economic growth and it stresses economic freedom and promoted free competition within markets and laissez-faire markets (Palley, 22).
The fundamental differences of classical and Keynesian theories are:
Classical economics based their theory that the market was perfect and could stand on its own (self sustaining) and that no government mediation was required. Classical economists believe that too much government spending takes away valuable resources needed by businesses for investment. While the Keynesian economics describes that the market is imperfect and requires intervention from the government and that it is not self sustaining. Keynes argues that government spending improves the economy and can replace absence of consumer spending.
Classical economist show that price level varies in response to changes in the quantity of money. Quantity theory of money seeks t o explain the value of money in terms of transformation in its amount. Keynesian economists discard the quantity theory of money; according to them under-utilization of resources and recession in the economy leads to substantial increase in real output and employment without affectively price level.
Classical economics tends to resolve and give long-term solutions to the economic problems. Regulation of the government, effects of inflation and taxes plays an important role in the providence of solutions to the economic problems in the long term. Keynesian economies focus on the providence of short term solutions to the economy problems; how economic policies can make instant corrections to a country (Miller, 45).
The multiplier effect can be described as the expansion of a country’s money supply due to banks ability to lend money. The percentage of bank deposits known as bank reserves influence the multiplier effect. It is money used to create more money and is calculated by dividing total bank deposits by the reserve needs. The multiplier effect can also be described by the fact that one individual’s spending becomes someone else’s income and the second individual’s income is subsequently spent, becomes the income of other persons (third person) and the chain builds on.
Wealth effect is described as the changes in aggregate demand caused by change in the value of assets such as stocks, property and bonds. Increase in the market value of assets induces the feeling of being wealthier and often tends to stimulate spending and use of savings. Value of stock rises due to escalating stock prices; investors feel more comfortable causing them to spend more. A positive wealth effects arises when an increase in wealth gives rise to an individual spending more than they had planned or if the marginal yield on gaining assets is diminishing or penalty cost is increasing (Miller, 96).
What are the five factors that lead to the increase or the decrease of aggregate demand?
Exchange rates: when the exchange rate of a country increases, people will tend to export products less hence aggregate expenditure lowers leading to the decrease in the aggregate demand; however a decrease in the exchange rate increases the level of exporting of products in a country hence leading to an increase in the level of spending increasing the aggregate demand.
Income distribution: this is in direct conjunction with the wages and salaries of individuals in a country, when the people in a nation are receiving high level of income, they tend to spend more hence leading to an increase in the level of aggregate demand. However, if the level of salaries and wages in a country are low, the level of spending is low leading to a decrease in the level of aggregate demand.
Expectations of the future: when investors perceive that the future economy will be better, they tend to save leading to a decrease in the level of spending hence a decrease in the aggregate demand. However, if the investors and consumers perceive a decrease in the economy people tend to spend more hence leading to an increase in the aggregate demand.
Foreign income: an increase in foreign income in a country leads to the increase in the level of exports in a country, the level of spending increases hence leading to an increase in the aggregate demand. While low level of foreign currency in a country leads to less exporting of products leading to low level of expenditure leading to decrease of low aggregate demand.
Monetary and fiscal policies: the government may decide to control how consumers spend their money by increasing the level of taxes. A favourable tax policy will lead to increase in the level of spending among consumers, leading to the increase in the aggregate demand, while high level of taxes leads to less spending hence leading to the decrease in the aggregate demand (Leung, 34).
The attributes of good money:
It must be durable: money as a medium of exchange must be able to withstand the wear and tear due the constant exchanging. It should take a form that is able to stand the test of time.
It must be portable: as a medium of exchange and one that is constantly on the move from one person to another should be easily transferrable from one owner to another; this is mostly dependent on the size and weight.
It must be divisible and consistent: money must be easily separated into smaller forms without altering its fundamental characteristics. On the other hand it should also be easy to integrate it to form a larger amount without also having to alter its form.
It must have intrinsic value: this mostly focuses on the value and worth of money. The quality and the worth money carries should be agreeable by all and that its value does not change and it does not derive its worth from anything else.
It must have a long history of acceptance, the form or material that makes money should have be acceptable or agreed upon between nations and within a nation for a long period of time. This is common to gold and silver for it has been acceptable over the years.
Should be malleable, should be able to be changed or remoulded into another new form or can be remade to create new money (Leung, 77).
Contrary to famous belief that money is created by government printing. Banks actually create money through deposits and making of loans. Banks create money through the issuing of loans, when a bank issues out money to a person, the bank is able to create more money through giving out of deposited money at a higher rate to someone who wants the loan. Through interest earned from loans offered to the government through treasury bonds and bills.
The bank may also make money through floating of shares to the public; through the sale of company shares the bank is able to make money.
Through interest it gains from loans. When a bank lends out money to an interested party, it sets a certain percentage rate at which the principle amount gains value within a given period of time. Through this interest earned on loans the bank is able to create money.
Banks can also make or create money through investments. Banks may decide to buy shares from other companies. Through the dividends earned through the shares the bank is also to create money. Banks may also decide to invest through real estates, the bank through building estates and selling them, the company gets to get money through selling these houses.
Government bonds- one can buy government bonds which are offered by the government as a way to take out of circulation some of the money in the economy. They have a permanent rate of interest and thus their interest rate is not affected by inflation. This also makes it possible to estimate the amount that one should get at the end of the period. Government bonds can have a maturity period of even 50 years thus can be invested for any period above one year.
Real estate-one can invest in real estate especially in terms of land. This is effective especially if one buys freehold land which has no time limit of holding the property and in most cases no rates is charged on holding the property. This can later be sold at a profit. This is because land is one of the few factors that keep on appreciating every other time. It is therefore safe to assume that it will be an assured profit maker.
Fixed accounts- this is a product offered by commercial banks. One can deposit into a fixed account for a period agreed upon by both the bank and the customer. The interest rate on this deposits changes very slightly in the course of that period. This assures the customer of a somewhat predictable amount at the end of the period agreed upon. The periods can be very long but the account holder is given the option of withdrawing before the period ends be it without the interest to be accrued at the end of the agreed period.
By definition the difference between fiscal policy and monetary policy is that: a fiscal policy involves the change in tax rates by the government and the level of government expenditure and their influence on aggregate demand. While monetary policy involves the changing in the interest rates and its influence on the money supply.
In fiscal policy the government uses the following tools: increase its spending, this has the effect of increasing demand on labour resulting to low unemployment levels. Through cutting the level of taxes, through this the government is able to create demand for goods when the economy takes a turn for the worse. With more money in the pocket, consumers are able to spend more hence increasing the aggregate demand.
While on the other hand, involves manipulation of the available money supply within the economy, higher interest rates increases borrowing costs and reduces consumer spending and investment, leading to lower aggregate demand. Fiscal policy is usually used to increase the aggregate demand while the monetary policy is used to reduce inflation. Monetary policy on the other hand is used to decrease the rate of inflation and reduce the level of unemployment in a country. This in other words is called reduction of stagflation.
References:
Leung, Man Por. Macroeconomics. Hong Kong: Hung Fung Book Co., 1990.Print.
Miller, Roger Leroy. The Economics of macro issues. 2d ed. San Francisco: Canfiled Press, 1978. Print
Palley, Thomas I.. Post Keynesian economics: debt, distribution, and the macro economy. Houndmills, Basingstoke, Hampshire: Macmillan Press ;, 1996. Print.
Economics The Great Depression.
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Economics: The Great Depression.
The Great Depression, a period of great economic distress lasting between 1929 and 1942, was the result of many factors. Seen as ‘the greatest economic disaster in modern times’ (Smith 7), it was characterized by extensive negative effects in the lives of many people in the industrialized nations of the world. The United States was particularly hard hit having attained a ‘world power’ status after World War 1 ended. Businesses were booming and the commercial status of this and other industrialized countries was rapidly on the rise.
Causes of the Great Depression.
The first cause of this detrimental economic period was the stock market boom. In the 1920’s, much of the business going on the stock exchanges was almost purely speculative. People kept investing in stock rather blindly believing that it would make them rich very quickly due to the perception that the prices would always keep going up. This on its own was very risky, but was compounded by even more serious practice of buying stocks on margin. Here, speculators borrowed money and bought stocks believing they could sell it later and make a tidy margin without using their own money. The problem most did not realize was that the stocks prices were artificially high, especially between 1925 and 1929 in the New York Stock Exchange. This culminated into a major crash on October 24th 1929, a day referred to as ‘black Thursday’. Baldwin shows how this was made international by the US Federal Reserve’s attempt to curb runaway stock prices using tighter monetary policy (p. 33), something which led to other countries adopting the same due to their commitment to the gold standard.
The second major cause of the Great Depression was a widespread bank failure. It is estimated that through the 1930’s, at least 9000 banks failed and collapsed since most of their deposits were uninsured and with their collapse, people simple lost their savings. Many banks had undertaken expansion on a reckless scale in the 1920’s, leaving them very much exposed when the depression hit, Examples such as Caldwell and Company as well as the Bank of the United States in New York City best show this. Some scholars, namely Schwartz and Friedman, have even suggested that the death of the death of the New York Federal Reserve Benjamin Strong could have been the cause of the depression based upon the effects this had on the price of bank deposits and the restriction of payments. However, this was disputed and shown to not be the case as the economy had been far less stable than had been previously thought meaning the bank deposits had little or no effect.
Underneath the apparent big business boom that precipitated the Great Depression, farming as an important national and international sector was on the opposite side of the success spectrum. Farmers were generally not enjoying the prevailing boom as they produced a lot of produce whose prices did little if anything to change this. It is estimated that farm prices fell by as much as 40 percent during this period, something which forced many off their farms as their returns were incapable of servicing loans owed to banks, themselves eager to get back their money as the depression cornered them too. Bernanke demonstrates this sad relationship between farmers and banks where he states that ‘at the beginning of 1933, owners of 45 percent of US farm, holding 52 percent of the value of farm mortgage debt, were delinquent in payments (Hart p. 138). This was further protracted by the drought conditions that affected the region, most famously in the Mississippi valley in 1930.
As businesses began failing, the government set up protective policies to cover their industries from the effects of the depression. The Smoot-Hawley tariff of 1930 is one such policy whose work was primarily to protect American companies from the erosive effects of imports. They charged a high import tax for imports thus lowering trade between United States and her allies, especially Europe. But this came with retaliatory activity since these trade partners too lost revenue due to the policies. The United States enacted the Smoot-Hawley tariff to protect its companies well knowing that its reliance on international trade was quite small. This was not the case for some of its trade partners, whose income from international trade activity constituted a large portion of their budgetary sources. This tariff bumped the rates from 29.5 percent to 50 percent in the period between 1931 and 1935 meaning many countries could not absorb this. However, with the retaliatory activity orchestrated by the effected countries, especially European ones, American exports suffered a bad blow falling from 5.2 billion to 1.7 billion in dollar terms. This coupled with the adjoining fall in prices meant the major agricultural commodities the United States traded were directly related to a large percentage of farming citizens who in turn had no option but to default in bank loans and further aggravate the looming depression.
‘Low wages were a major cause of poverty during the great depression’ as Jennings points out in her study on poverty in America (p.95). This was especially rife among factory workers during this period characterized by a major industrial expansion. Ford Motor Company as well as a few other large entities could afford to stay in production, albeit a slowed one, while paying decent salaries to their workers. This was not the case for many others especially when cheaper labor in the form of immigrants and African Americans from the south came up north offering factory owners cheaper labor. The inability of their employers to pay them decent wages, coupled with the general overproduction rife then meant companies produced what potential buyers could not purchase. This introduced massive losses to the companies with some even closing down while bank loans went unpaid and people were left to languish in poverty.
Why the Great Depression lasted so long.
As discussed above the economic condition slumped between 1929 and 1942 leading to vast array of problems for countries and their citizens. In addition, a radical shift from traditional economics to Keynesianism was witnessed as well as people’s perception on the ‘role of government’ (Bernstein p. xv). But a general consensus was reached as concerns the reason why this depression lasted so long. It has been demonstrated how a mixture of perverse fiscal policy, government control and regulation as well as rampant unemployment were the main causes of the extended stagnation witnessed.
During his reign, president Hoover led the United States through a reckless period of overspending, over taxing and increasing national debt as well as chocking off trade. This during a time the depression proved to be perilous and downright detrimental to his government as well as the economy as his opponent in the 1932 election Franklin Roosevelt speculated. The worse mistake of the Hoover administration was the Smoot-Hawley tariff of June 1930. It set the stage for worse effects left by its predecessor – the Fordney-McCumber tariff of 1922 that had harmed the agricultural sector, a major industry of the country then. The resulting virtual closure of borders to foreign trade ignited a vicious international trade war that very well crippled the basis of United States citizenship’s breadwinning industry –agriculture. This coupled with the drought that left Mississippi bearing the name ‘dustbowl’ extended a depression that could very well have dissipated in a much shorter time.
To aggravate the already dire situation, Hoover government set policies that overtaxed an already poverty stricken American citizen desperately trying to service loans to impatient banks. The Congress passed and President Hoover ignorantly signed the Revenue Act of 1932 that saw some income tax brackets double their remittances. The topmost bracket doubled shifting from 24 percent to 63 percent! In addition, exemptions were lowered and earned income credit done away with. Corporate and estate taxes were raised, gasoline and automotive taxes were imposed and postal tax hiked quite sharply.
Franklin Roosevelt also contributed to the long duration of the depression in a rather ironic fashion seeing how critical he was of his predecessor’s administration. His new policies, affably named the ‘New Deal’, were designed to improve the economic condition of the country by spending 10 billion dollars while the nation’s revenues only amounted to 3 billion dollars (Reed). This pointed to increasing national debt but he decided to increase taxes on the still struggling American people. The Agricultural Adjustment Act (AAA)’s act of destroying large agricultural produce and commodities, as well the National Industrial Recovery Act (NIRA)’s arm twisting of companies into national cartels also pinpoint other administrative flaws causing the Great Depression’s extended period. This is because all these undermined the citizen’s ability to try and improve their earning power.
Works cited.
Bernanke, Bernard. “Nonnmonetary effects of the financial crisis.” Essays on the Great Depression. Los Angeles: Princeton University Press, 2009. 53. Print.
Bernstein, Michael. “Introduction.” The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939. Los Angeles: Cambridge University Press, 1989. 4. Print.
Jennings, James. “What are the major explanations of the great depression?.” Understanding the nature of poverty in urban America. Boston: Greenwood Publishing Group, 1994. 95. Print.
Smoith, Robert. “Student reading pages.” The Great Depression Spotlight on America Series. Hendersonville: Teacher Created Resources, 2006. 7. Print.
Temin, Peter. “The Midas touch.” Lessons from the great depression Volume 1 of The Lionel Robbins Lectures. Massachusets: MIT Press, 1989. 49. Print.
Final Examination
Final Examination Part II Grade Sheet for _________________________________________________________________________________________
Point Value 10 9 8 7 6 5 4 3 2 1 Subtotal
Five Articles Fulfill the Requirements of the Assignment Two-point deduction for each unfulfilled requirement. 0
A Theme Was Selected Yes It Was (1)No It Was Not (0) 1
The Theme Consists of One Idea, Not Two or More Ideas Yes It Was (1)No It Was Not (0) 1
There Are Five References to the First Name, Last Name, and Title of Each Source
(No Partial Credit) 5 elements fully present 4 elements fully present 3 elements fully present 2 elements fully present One element fully present (1)All elements missing (0). 5
Accuracy and Thoroughness of the Summaries without Recopying the Articles
(No Partial Credit) 5 summaries fully accurate and thorough 4 summaries fully accurate and thorough 3 summaries fully accurate and thorough 2 summaries fully accurate and thorough One summary fully accurate and thorough (1)No summary fully accurate and thorough (0). 5
Development of Responses(Two Responses Per Source) 10 responses were well developed 9 responses were well developed 8 responses were well developed 7 responses were well developed 6 responses were well developed 5 responses were well developed 4 responses were well developed 3 responses were well developed. 2 responses were well developed. One response was well developed. (1)
All responses could use further development. (0) 10
Each Response Pertains to the Theme Under Examination 10 responses pertain to the theme under examination. 9 responses pertain to the theme under examination. 8 responses pertain to the theme under examination. 7 responses pertain to the theme under examination 6 responses were well developed 5 responses were well developed 4 responses were well developed 3 responses were well developed. 2 responses were well developed. One response was well developed. (1)
All responses could use further development. (0) 10
Internal Sentence Organization No Errors 1 error detected 2 or more errors detected 5
Level Three Grammatical Errors One error 2 errors 3 errors 4 errors 5 errors 6 errors 7 errors 8 errors 9 errors 10 or more errors 10
Level Two Grammatical Errors 1 error 2 errors 3 errors 4 errors 5 or more errors 5
Level One Grammatical Errors 4 errors 8 errors 12 errors 16 errors 20 or more errors 5
Bonus Points 2 points offset Level 1 errors.3 points offset Level 2 errors.4 points offset Level 3 errors.Leftover points appear in the box to the right. 0
The Sources Fulfill The Requirements of the Assignment
Two-point deduction for each source not fulfilling the requirements 0
Presence of a Works Cited Page Two-point deduction for each missing citation, including citations that should be present but are not. 0
Subtotal 57
Point Value 10 9 8 7 6 5 4 3 2 1 Subtotal
Accuracy of MLA Citation Format Two points per accurate citation, including two points for bonus citations. Partial credit awarded. 10
Sources are Alphabetized Accurately ` Yes 5
Format Errors No errors 1 error 2 errors 3 errors 4 or more errors (0) 5
Forgot Sentence Numbers or Single Spaced Ten-point deduction 0
Sentence Shortages/Overages Two-point deduction per error 0
Bonus Points for Quality of Execution Excellent Degree of Execution Above Average Degree of Execution 0
Subtotal 20
Previous Subtotal 57
Total (77 Points Maximum) 77
Lateness Penalties Essay received by 3:00 PM CST Monday, November 27, 2017
(Full credit of 77/77) Essay received by 3:00 PM CST Monday, December 4, 2017
(Limit of 69/77) Essay received after 3:00 PM CST Monday, December 4, 2017 (ZERO) 0 Total Converted to 300 Points 300