Question

The following lyrics discuss the appropriateness of the government bailouts in response to the 2008 financial crisis. Explain why Keynesians generally support these policies while Hayekians do not.

[Hayek] "And yet it continues as a justification for bailouts and payoffs by pols with machi nations. You provide them with cover to sell us a free lunch, Then all that we’re left with is debt, and a bunch. If you’re living high on that cheap credit hog don’t look for cure from the hair of the dog. Let’s not repeat what created our troubles. I want real growth not a series of bubbles. Stop bailing out losers, let prices work. If we don’t try to steer them they won’t go berserk."

Answer 1

Explanation:-

The stock market is the market for corporate shares. Investment in shares is subject to market
risks. The value of a stock depends on three factors: the expected future earnings, the maturity
date and the present discount rate. The price of a stock follows the random walk theory.

According to the random walk theory current stock prices will reflect all the current information
including the future earning of the company, interest rate and health of the economy. Therefore,
the price reflects the information about the future that is already known through current parameters. But the future value of the stock prices will be a surprise event and will be unpredictable.

This theory tells that all predictable occurrences already get reflected on the current stock prices. .
The direction of movement of the parameters that determine the current stock prices are .
unpredictable and thus does not get reflected on current prices. Hence. the future direction of
stock prices can never be correctly predicted by any experts. So if someone gives a “hot new™
stock tip, it is unlikely that it will be a sure thing.

According to the random walk theory future value of the stock prices will be a surprise event and
will be unpredictable. Therefore, whether someone profits from purchase of the stock bought
from a broker depends on the future direction of prices that depends on future earning of the
company. interest rate and health of the economy. If the price goes up in the future the buyer will
profit. and not if otherwise.

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