Question

Keynes Reading Study Guide

Read that article and use the knowledge you have acquired in the course to answer the following questions.   Answer these questions using diagrams, concepts, determinants, etc.

1. On page 251, the author describes four changes that occur between 1929 and 1931 in the nation’s economy:
   1. Change in residential construction
   2. Change in savings accounts
   3. Change in salaries, dividends, and wages
   4. Change in number of businesses

For each change, explain what the change was and the impact the change Demand in that market place, which determinants was impacted. Feel free to use diagrams to show how the markets would change.

2. On page 259, you will find one of my favorite Keynes quotes: “the danger confronting ……”. This quote predicts the economic and political events in Europe that will be seen over the twenty to thirty years.
   1. What happened in Europe over the next twenty to thirty years after The Great War that Keynes predicted? (think about the economies of the major European participants in the war: England, France, Germany, Russia, Austria Hungary, and Italy). Use Google if you don’t know what happened to these economies after the Great War.
   2. Why would requiring Germany to pay massive reparations to the allies cause Keynes prediction to come true? Background - Reparations is the transfer of Kapital from one country to another as a penalty to help pay for the war. Germany was required to make the payments whether it had the Kapital at the German Central Bank or not (it turned out that Germany needed to borrow the money). Use diagrams and words to show how this transfer would likely impact the German economy (PPFs and the D/S diagram for goods in Germany).

3. On pages 262-270, Keynes provides the theory behind what happened in the Great Depression. On pages 270-271, he explains what occurred in the economy that was not as classical economists had expected and what was needed to solve the issue.
   1. Pick to products from that time period and us diagrams and words to show/explain how two markets would be impacted by the change in expectations, fall in stock market and increase in unemployment.
   2. Using diagrams and words, show/explain what Keynes said was the problem with this explanation for the recovery from the “trough.

4. On page 276, according to the author, business people were against the Keynesian solution to the Great Depression. The author further provides the size of the increase in G (government spending) that the New Deal injected and we see its comparison to the subsequent increase in G to fight World War 2. Note also how Keynes says that government spending should be reduced during the “peak” periods of the business cycle.
   1. Why were business people afraid of Keynsian economics?
   2. Google “why people were against the stimulus package in 2008”.   Have attitudes

changed? Provide a few quotes from articles you find in Google.

5. Finally on page 275, Keynes uses humor to highlight a potential solution to the economic downturn.
   1. Why would his humorous/absurd anecdote work? What components of D and/or S would be impacted (why – determinants)? Draw an S/D diagram that shows the before and after based upon the change in the components.
   2. Would it work?   Explain using diagrams and determinants.

As a final comment, read Keynes’ quote on page 285 about what it takes to be a good economist. I think he is mostly right. I want you to think about his words and tell me someday if you agree or not. I do think that part of why I have loved economics is for the reasons he cites that it is a multidisciplinary area of study that is always changing and evolving.

Answer 1

Answer 1.

Changes occuring during 1929 to 1931 in Britain

This period is known as the Great Depression in history. It was a period of economic slump that saw poor economic condition in the Western economy.

Understanding following changes in the economy:

• Change in residential construction:

Nature of change- The period saw a decline in residential construction. The construction companies did not had the money to invest and government reduced their spending on infrastructure.

Impact the change on demand in the market place- Decline in supply led to increase in prices of residential construction and therefore decrease in demand.

Determinants of change in demand- High interest rates and low disposable income with people

• Change in savings accounts:

Nature of change- As the interest rates increased, savings exceeded investment. In other words, as the financial institutions increased interest rates on lending funds, people started investing less in the economy and therefore savings increased.

Impact the change on demand in the market place- Increase in the tendency to saving led to decline in the profits of the business as the customer base reduced. This led to increased supply than the quantity demanded that led to losses and high number of business failures.

Determinants of change in demand- High unemployment and reduced wage rates

• Change in salaries, dividends, and wages

Nature of change- Business failures led to high unemployment rate. This led to fall in salaries and wages of labours and decline in the profits of shareholders.

Impact the change on demand in the market place- As the salaries, dividends, and wages reduced, the disposable income fall too. This led to decrease in demand in the market that further led to increase in unemployment.

Determinants of change in demand- Fall in disposable income and discouraged investment.

• Change in number of businesses

Nature of change- A number of firms went out of business

Impact the change on demand in the market place- Supply declined in the market. This led to shortage and therefore increase in prices. High prices and low disposable income further reduced the demand.

Determinants of change in demand- High unemployment and fall in disposable income.