Question

1a)Consider the period between 1945 and today Name two major economicevents Briefly describe each one of them.

B)In your own words , explain the main differences between the neo-classical and Keynesian views of the economy.

Answer 1

1-Post world war 2 (economic boom ):Even before the war ended, U.S. business, military and government officials began debating the question of the country’s reconversion from military to civilian production. In 1944, Donald Nelson of the War Production Board (WFB) proposed a plan that would reconvert idle factories to civilian production. Powerful military and business leaders pushed back, and plans for widespread reconversion were postponed.But with the war wrapping up, and millions of men and women in uniform scheduled to return home, the nation’s military-focused economy wasn’t necessarily prepared to welcome them back.Some economists even predicted a new crisis of mass unemployment and inflation, arguing that private businesses couldn’t possibly generate the massive amounts of capital necessary to run the pumped-up wartime factories during peacetime. A report released in mid-1945 by Senator James Mead of New York took this opinion, arguing that if the war in the Pacific ended quickly, “the United States would find itself largely unprepared to overcome unemployment on a large scale.”But history proved the pessimists wrong. Most returning veterans had no trouble finding jobs, according to Herman. U.S. factories that had proven so essential to the war effort quickly mobilized for peacetime, rising to meet the needs of consumers who had been encouraged to save up their money in preparation for just such a post-war boom.By the summer of 1945, Americans had been living under wartime rationing policies for more than three years, including limits on such common goods as rubber, sugar, gasoline, fuel oil, coffee, meat, butter, milk and soap. Meanwhile, the U.S. government’s Office of Price Administration (OPA) had encouraged the public to save up their money (ideally by buying war bonds) for a brighter future. With the war finally over, American consumers were eager to spend their money, on everything from big-ticket items like homes, cars and furniture to appliances, clothing, shoes and everything else in between. U.S. factories answered their call, beginning with the automobile industry. New car sales quadrupled between 1945 and 1955, and by the end of the 1950s some 75 percent of American households owned at least one car. In 1965, the nation’s automobile industry reached its peak, producing 11.1 million new cars, trucks and buses and accounting for one out of every six American jobs.Driven by growing consumer demand, as well as the continuing expansion of the military-industrial complex as the Cold War ramped up, the United States reached new heights of prosperity in the years after World War II. Gross national product (GNP), which measured all goods and services produced, skyrocketed to $300 billion by 1950, compared to just $200 billion in 1940. By 1960, it had topped $500 billion, firmly establishing the United States as the richest and most powerful nation in the world.

The 2008 financial crisis devastated Wall Street, Main Street, and the banking industry. The Federal Reserve and the Bush administration spent hundreds of billions of dollars to add liquidity to the financial markets.The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. That created the financial crisis that led to the Great Recession.The Great Recession—sometimes referred to as the 2008 Recession—in the United States and Western Europe has been linked to the so-called “subprime mortgage crisis.” Subprime mortgages are home loans granted to borrowers with poor credit histories. Their home loans are considered high-risk loans.The markets took about 25 years to recover to their pre-crisis peak after bottoming out during the Great Depression. In comparison, it took about 4 years after the Great Recession of 2007-08 and a similar amount of time after the 2000s crash.For both American and European economists, the main culprit of the crisis was financial regulation and supervision (a score of 4.3 for the American panel and 4.4 for the European one).The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009.

2-As you now know, neoclassical economists emphasize Say's law, which holds that supply creates its own demand. Conversely, Keynesian economists emphasize Keynes' law, which holds that demand creates its own supply.Keynesian economics tends to view inflation as a price that might sometimes be paid for lower unemployment; neoclassical economics tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.The tension between Keynesian and Neoclassical Economics takes us to the heart of debate, disagreement and argument in modern macro-economics. Macroeconomics is a deeply divided subject. In some areas of economics there is widespread agreement on how the economy functions and the effects of policies – such as in the field of international trade, where there is a common view on the causes and consequences of trade across borders and the likely effects of the imposition of tariffs or quotas. But macroeconomics is very different. Macroeconomists disagree on fundamental issues, such as whether markets should be allowed to function independently of government, or whether intervention is required.For Keynes, the market system could create under-employment (and over-employment of resources). Demand and supply would not automatically balance as sticky prices and animal spirits would leave demand and supply out of equilibrium and the expectations of workers and firms disconnected from reality. Keynes saw government as the paternalistic actor necessary to intervene in the market mechanism, taxing and spending workers and firms in order to rebalance aggregate demand and supply in the economy.Neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind the production, pricing, and consumption of goods and services. It emerged in around 1900 to compete with the earlier theories of classical economics.Rate of interest, being a purely monetary phenomenon, brings equality between demand and supply of money.Role of Money – Keynes completely departs from the classical as well as neoclassical theories and gave a purely monetary theory of interest. He considered money both as a medium of exchange and a store of value.Keynes’ theory was regarded not only by himself but by many economists as a revolution in economics. However, his theory was later questioned giving place to the Neoclassical Synthesis, a number of theories that reunited Keynes’ and previous economists’ views and created a more formulated prospect of macroeconomics.