Question

John Maynard Keynes wrote his famous work, "The General

Theory of Employment, Interest and Money", in 1936.

1. Did Keynes believe the economy was self regulating, as is portrayed in chapter 9 of the text.

2. What is the classical view of the macroeconomy and unemployment?

3. Explain what was happening in the 1930's that might lead Keynes to question the classical position on the macroeconomy.

4. What is the marginal propensity to consume?

5. What is the multiplier?

Suppose taxes were increased by $50 billion (say $200 tax surcharge for all of the nation's 250 million citizens).

1. Would this have an expansionary or contractionary effect on the economy?

2. Do you expect there would be a multiplier?

1. What is it called when the short-run equilibrium output is less than the long- run natural (full employment) level of output? In this situation, is the unemployment rate greater than 5% or less than 5%?

Explain

2. What is it called when the short-run equilibrium output is greater than the long-run natural level of output? Is the unemployment rate greater than or less

than 5%? Explain

3. What about the period of the 1930's? Was the economy at full employment during this period? Were we in a short-run equilibrium or a long-run equilibrium? To answer this question, you may wish to look at the attached GDP data, or consult http://www.bea.doc.gov/ for more complete data.

4. Given the situation in the 1930's, can you understand what the economist Keynes was saying in the following statement? "In the long-run, we are all dead."

Answer 1