Microeconomics: Keynesianism(Fiscal policy) and Classical Economists(Monetary ploicy)

A. Keynesianism (fiscal policy)

1.       Identify what Keynes thought caused the Great Depression of the 1930s.

2.       Identify the most important cause according to Keynes and indicate what government policy he thought could be implemented to get the economy working again.

3.       What Keynesian government policy (policies) was (were) implemented to combat the Great Recession of 2007-2009? What Keynesian policy (policies) was (were) implemented to combat the blow to the national economy due to the Covid-19 lockdown?

4.       How big are the Keynesian Spending Multipliers in the real world? Find estimates of them.

5.       Choose one of these estimates (there are many) and use the Keynesian Autonomous Spending Multiplier formula to work backwards from the estimated size of the multiplier to what size the Marginal Propensity to Consume would have to be for that multiplier to be true.

B.      Classical Economists (monetary policy)

1.       If Classical economists believe markets always tend to equilibrium, what did they think causes recessions and depressions?

2.       After watching Milton Friedman's "Anatomy of a Crisis," explain what Friedman, a neo-classical economist, thinks caused the Great Depression to be so severe. The video which was recorded in 1979 can be seen on YouTube here: https://www.youtube.com/watch?v=SWVoPrntBso.

3.       State briefly how this agrees with or disagrees (maybe both) with Keynes' analysis of the cause and severity of the Great Depression.

4.       What policy would Friedman's classical analysis lead him to propose?

5.       Look up data on FRED on what happened to the money supply and excess reserves in the 2007-2009 Great Recession and the 2020 Covid-19 contraction. By how much did M1 Money Stock and Excess Reserves increase in absolute dollars and in percentage terms from December 2007 to April 2014? How much did M1 Money Stock and Excess Reserves increase in absolute dollars and in percentage terms from February 2020 to May 2021?

C.      Considering the arguments and policies advocated by both the Keynesians and the monetarist Classical Economists you discussed above, which do you think worked best to pull the economy out of a recession in both cases? (Note: There is not “right” answer here. The instructor just wants to read your thinking on the matter.)

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