Session 2

Question 1

What are the two methodological pillars of the neoclassical school?

Answer 1

Positivism and methodological individualism

Question 2

What are the main results of neoclassical theory?

Answer 2

A general equilibrium exists: markets are always capable of finding a price so that demand is equal to supply
Fundamental welfare theorem: A perfectly competitive equilibrium is efficient and is the best possible outcome

Question 3

What are the conditions for the welfare theorem to hold?

Answer 3

1. Perfect competition
2. Perfect (symmetric) information
3. Complete markets
4. (Price flexibility)

Question 4

What’s neoclassical economy take on inequality?

Answer 4

Not taken into account, and they believe that taxes distort incentives and market dynamics. The market will find the optima equilibrium so there’s no need for policy.

Question 5

Interest rate is equal

Answer 5

To savings and investment

Question 6

What is the role of prices?

Answer 6

Based on Say’s Law, Price variations in optimally working markets lead to optimal equilibrium and to enough demand to absorb full employment supply

Question 7

What are savings?

Answer 7

A lack of demand, S= Y - C. For this reasons interest rate variation ensure that investment completely absorbs savings. S = Y

Question 8

What led to the Keynesian revolution?

Answer 8

The realisation that full employment is not automatic

Question 9

Under Neoclassical thought by what is full employment guaranteed?

Answer 9

By labour market equilibrium, through wage changes

Question 10

What does Keynes theory focus on?

Answer 10

It focuses on aggregate demand.

Question 11

What’s the biggest difference between Keynes and neoclassical dudes on money?

Answer 11

For Keynes money is not simply used for transactions, but also as a safe story of value. For N it’s just transactions.

Question 12

What are Keynes main argument?

Answer 12

• Liquidity preference
• Issue of radical uncertainty and expectations that may lead people to hoard money
• Savings are larger than investment (aggregate demand is lower than supply)
• The lack of demand cause unemployment
• Wage flexibility is ineffective to cure unemployment

Question 13

Implications for both schools of thought?

Answer 13

N : full employement requires the removal of market rigidities
K -> because some savings leak out, there is a need to fill the aggregate demand gap

Question 14

What are the policy implications of Keynes

Answer 14

Fiscal and monetary policy have a role in compensating the behaviour of the private sector. Fiscal policy is to be preferred because of the liquidity trap.

Question 15

What led to te crisis of Keynes paradigm?

Answer 15

Staglfation, it showed that agents can change their behavior and expectations in response to police change.

Question 16

What was the neoclassical model focused on?

Answer 16

Rational expectations, as being endogenous rather than exogenous It stated that government discretionary policy is ineffective even in the short run because people anticipate government moves.

Question 17

What is the new consensus?

Answer 17

• Structural reforms are the main tool to improve long-run growth as they reduce rigidities
• Nominal stability reduces uncertainty
• Macroeconomic policy have no role to boost growth because predictability is needed, and we don’t want to crowd out private expenditure
• Monetary policy is preferred, because no biases or lags

Question 18

What are the maastricht convergence criteria?

Answer 18

• Inflation,
• long term interest rate
• ERM membership
• Budget deficit
• Public debt

Question 19

What the dominant macroeconomic policy?

Answer 19

• No discretionary fiscal policy, because Stability and Growth Pact requires budget balance over the cycle
• Monetary policy -> strict inflation target for the ECB

Question 20

Is the EU neoliberal and why?

Answer 20

Yes bitch.

• Markets seen as the main drivers of growth and convergence
• Institutions have left little space for government action
• Reforms as the only path to growth

Question 21

What was the main cost of the Eurozone?

Answer 21

Loss of monetary policy as tool to absorb asymmetric shocks, so decision to rely on markets to absorb asymmetric shock.