Keynes

Question 1

How did pre-Keynes economists view money vs. Keynes?

Answer 1

Earlier economists considered money neutral. Markets self-adjust with SR and LR effects.

Question 2

What was the historic setting for Keynes?

Answer 2

The Great Depression - “Black Thursday” which caused bankruptcies and unemployment

Question 3

Explain Keynes’s ideologies about wage rigidity?

Answer 3

he nominal wage level is inflexible downwards ( inflexible when low) due to institutional factors. He believed that wages are essential for effective demand (They shouldn’t go down).

In such time when w is low ( or crises), firms cut down output and labor. Demand for labor determines employment. It depends on demand for consumption and investment goods

Question 4

What ideology did Keynes inherit from Malthus?

Answer 4

Lack of effective demand may lead to stagnation.

Question 5

Briefly summarize Keynes views on consumption and investment?

Answer 5

1. Y=C+I
2. Investment multiplier (explain it and the effect)

Extra info:
C > income and savings
I> r and expectations and uncertainty
I should go up till r = marginal efficiency of capital

Question 6

What are the main theories Keynes discussed in his lifetime?

Answer 6

1. Wage and price rigidity
2. Macro economics/Equilibrium
3. Fiscal and monetary policy
4. Demand side - macroeconomics

Question 7

What is liquidity preference and what did Keynes and neo-classical economists disagree about?

Answer 7

Demand for money: Transaction motive, Precautionary motive, Speculative motive.

Disagreed with neo-classical economists that r = savings supplied + savings demanded for I. He proposed that r depends on D&S of money. Savings depend on income.

Question 8

How did Keynes define the macroeconomic equilibrium situation?

Answer 8

Y=C+I, S=Y-C > S=I

Correlation between national income and employment

Extra info:
Correlation illustrated by the multiplier effect on effective demand.

Question 9

What government policy did Keynes propose and why was it different from previous economists?

Answer 9

Expansionary monetary policy > Increase I and employment.

Fiscal policy to stabilize employment by influencing aggregate demand.

He was the first to argue for government intervention without rejecting the market mechanism.

Question 10

Did Keynes advocate for government intervention and why/why not?

Answer 10

Government intervention required to maintain high levels of effective demand