Question

Answer the following unrelated short-answer questions.

a. An economist makes the following argument – “The economy basically self-corrects out of recessions. When the economy is in recession, unemployment creates an excess supply of labor, which causes wages to fall. As a result, employers increase their hiring and the economy recovers automatically.” How would a Keynesian respond to this claim?

b. Consider an economy where the reserve ratio is ? = 0.2 and the currency ratio is ? = 0.2. What Fed bond purchase is required in order to raise the money supply by $600 billion?

c. In 2019, government purchases of goods and services at all levels of government were $3.75 trillion (about 17% of GDP). Yet, the federal government alone had expenditures of $4.8 trillion. How can you explain this apparent inconsistency?

Answer 1

Answer ;

a) :- An economist makes the following argument – “The economy basically self-corrects out of recessions. When the economy is in recession, unemployment creates an excess supply of labor, which causes wages to fall. As a result, employers increase their hiring and the economy recovers automatically.” How would a Keynesian respond to this claim?

The keynesian view doesn't adjust with such clarification of automatic correction of economic recession. the wage and price are downward sticky, hence when there is fall in the aggregate demand, the wage rate doesn't decline all the while. along these lines automatic mechanism doesn't correct itself.

Here government intervention is required to correct the recessionary pressure in the economy.

b) :- Consider an economy where the reserve ratio is ? = 0.2 and the currency ratio is ? = 0.2. What Fed bond purchase is required in order to raise the money supply by $600 billion?

M = cr +1/(cr+rr)

= (0.2+1)/(0.2+0.2)

= 1.2/0.4

= 3

Purchase of treasury*3 = 600

Purchase of treasury = 600/3 = 200 billion.

c) :- In 2019, government purchases of goods and services at all levels of government were $3.75 trillion (about 17% of GDP). Yet, the federal government alone had expenditures of $4.8 trillion. How can you explain this apparent inconsistency?

The general expenditure of government surpasses the expenditure on the goods and services. it proposes that government is associated with the social program where transfer payments are made in monstrous number or overwhelmingly.