Part I:

Question 1: How can governments influence the long run rate at which the economy grows?

Question 2: ... or do governments have little power to affect long run performance?

Fiscal policy: Managing Aggregate Demand

Question 3: Keynesian economics is often viewed as justifying increases in deficit spending by the government to stimulate real economic activity. How does this proposal relate to Keynes own writing reproduced in the case?

Question 4: What role do confidence and psychology play in Keynes understanding of the economy  and the role of government?

Question 5: Why is Keynes so concerned with uncertainty?

Question 6: Explain intuitively the mechanism by which an increase in government spending can lead to more output.

Question 5: Is it reasonable to assume that firms will supply more output when consumers and the government demand to purchase it?

Question 6: Read the following from the Washington Post, 1 August 2003:

The economy continued to lose jobs during the 2nd quarter, as the jobless rate rose to a nine-year high of 6.4 percent in June. But the Labor Department reported yesterday that the number of people filing initial claims for unemployment benefits declined again last week, a possible signal that the lackluster U.S. labor market is beginning to improve, analysts said. The government's July employment figures will be released today.

Democrats have increasingly complained that President Bush's economic policies, which have centered on income tax cuts for individuals and businesses, have done little to help the more than 9 million unemployed workers. The Bush administration welcomed the economic reports yesterday.

"Today's announcement . . . indicates that our economy is clearly moving in the right direction," Commerce Secretary Donald L. Evans said in a statement. "The president's tax cut is beginning to work its way into the economy, and the stock market continues to reflect the confidence that investors have in the short-term economic outlook. Today's report also shows increased business investment during this past spring and provides some welcome news to Americans looking for work this summer and fall."

Is the above article consistent with the predictions of the Keynesian theory?The Central Bank and Inflation

Question: Read the following from the Washington Post, June 27, 2003:

"Some Federal Reserve officials believed in early May that they might need to cut interest rates again to spur stronger U.S. economic growth but decided to wait because the recently ended war in Iraq had clouded the economic picture. At the same time, some officials made clear at their May 6 policymaking meeting that they would not wait indefinitely for the clouds to clear before lowering rates again in response to falling inflation rates and sluggish economic growth, according to minutes of the meeting released yesterday." What does the above article suggest that the Federal is trying to achieve?

The Blair Wealth Project: Antecedents and Prospects

Question 7: What were the causes of Britain's "stop-go" economy? Did Mrs. Thatcher address them successfully?

Question 8: What is the difference - if any - between "stop-go" in the 1950s and '60s and what Gordon Brown, New Labour's Chancellor of the Exchequer (i.e., Finance Minister) has called "twenty years of Tory boom and bust" under Mrs. Thatcher and her Conservative successors?

Question 9: Do you believe that the policies implemented by Blair's New Labour government will finally abolish macroeconomic instability in the U.K.? What role - if any - would adoption of the Euro play in containing such instability?

Inequality and the 'American Model'

Question 10: Which is of greater concern: poverty of inequality? Should we be concerned with rising inequality in the United States?

Question 11: How should business respond to inequality? Does it create business opportunities?

Question 12: What are the causes of inequality in the United States?

Question 13: What policy responses are appropriate? Can the United States learn from the experienceof other countries discussed in this course? If so, what lessons should it draw?

Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency

Question 14: How would you compare the NZ reforms of the 1980s to the Thatcher reforms in the UK that occurred around the same time?Mexico: The Tequila Crisis 1994-1995

Question 15: What is your answer to the question posed by the Banco de Mexico officials on page 1 of the case: ‘How could extensive and well-executed fiscal, supply-side and trade reforms end up in such a dismal situation'?

Question 16: What best explains the collapse of the Mexican currency: psychological factors (expectations and confidence) or fundamental factors (economic phenomena such as current account and fiscal deficits)?

Question 17: Should Mexico be "bailed out" by the international community? How does your answer to this question relate to your position on questions 1 and 2 above?

Question 18: Is Paul Krugman's analogy between the Mexican crisis and the "irrational exuberance" usually associated with tulipmania a good one?

Sub-prime Meltdown: American Housing and Global Financial Turmoil

Question 19: Who was to blame for the Sub-Prime Crisis in the US and the Global Financial Turmoil experienced in 2008?

Question 20: What can Policy Makers do to prevent another meltdown like the one suffered in 2008?

Part II:

Q1. Keynesian economics is often viewed as justifying increases in deficit spending ... How does this proposal related to Keynes own writing?

Q2. What role do confidence and psychology play in Keynes understanding of the economy and role of government?

You should emphasize the quote of Keynes that he believed that the Great Depression "comes from some failure of the material devices of the mind". And quote the examples of speculative stock market booms and busts that concerned Keynes.

The key issue is that lack of confidence and uncertainty about the future may lead business to stop investing and consumers to stop spending which may bring on a slump. So psychology plays an important role.

Q3. Why is Keynes so concerned with uncertainty?

Q4. Explain intuitively the mechanism by which an increase in government spending can lead to more output.

This is discussed in the case: ‘Fiscal Policy, Managing Aggregate Demand' and in our discussions of the multiplier. The key equations are Y = C + I + G which explains how higher G has a direct effect on creating more demand and leading to higher Y. The other key equation is C = a + cY which says that when Y goes up, there is an extra effect whereby consumption demand goes up which further raises Y and so on (i.e., the multiplier).

Q5. Is it reasonable to assume that firms will supply more output when consumers and the government demand to purchase it?

You must emphasize the concept of the ‘Output Gap' here. If actual output is greater than potential output then firms will be depleting stocks so that more demand is eventually going to push up prices/cause inflation (and not lead to more output). Only if actual output is less than potential output will firms have spare productive capacity to supplymore when there is more demand from the government or consumers.

Part III:

The Central Bank and Inflation

1. What revealed objectives do the actions of the Fed suggest that it is following with respect to its conduct of monetary policy?

I think the best answer would include a reference to the Taylor Rule that we discussed in class (see also Mankiw's discussion of it in his essay on US monetary policy in the 1990s). The idea is that the Taylor rule does a good job of explaining how interest rates were changed: they were lowered when unemployment went up to help stabilize the economy and raised whenever inflation started going up to help avoid more inflation (by So the revealed objectives appear to be that it is trying to achieve low and stable inflation and also avoid recessions when unemployment starts to rise.

2. Do you believe that the US Federal Reserve is independent? Has it been influenced by politicians?

The question is about whether the US Fed has set interest rates to help satisfy political objectives (e.g., to win elections) or whether they have solely been aimed at fighting inflation / stabilizing the economy. Are the costs of falling prices the same as the costs of rising prices? Why may they differ?

4. Should so much power be given to unelected central bankers like Greenspan?

One of the main points here is that giving lots of power to unelected central bankers may be good since then they have independence from politicians and the need to win elections. That can result in monetary policy aimed more at keeping inflation low than trying to boost the economy even when actual output equals potential output. However the downside is that you need a person who the markets have confidence in - that is, someone who conducts policy in a transparent and credible way.

5. Has Greenspan been a success at the Fed? What prepared him for the role of Chairman?

Most commentators seem to have judged that Greenspan has been a success using a range of indicators. You should use objective evidence to back up this view. For example, using measures of inflation, real GDP growth, unemployment, stock price rises and productivity growth, all of these do better under Greenspan than in the 14 years prior to his tenure.

6. Should Greenspan speak more clearly to Congress, the public and financial markets? Why or why not?

This is not a question with a right or wrong answer. You could discuss examples that we did in class about how the yield curve barely changed at all across the ‘anticipated' interest rate cut of 2 October, 2001 (shortly after September 11). This suggests that Greenspan had been communicating so well with the markets that they fully expected what was about to happen and the change was both transparent and credible. However remember there was also an earlier interest rate cut on 4 January, 2001 which did change the yield curve and ‘surprised' the markets, suggesting that communication had not beenso perfect. This is the kind of discussion that is expected here, including the idea that Greenspan may deliberately be eloquent or obfuscating, as the situation required.

7. Should economists be celebrities?

An important point to make here is the idea that celebrities leave no legacy (i.e., how do you copy one?) whereas rules can be implemented by any person, regardless of their celebrity status. This is an opportunity to discuss the question of discretion versus rules
(like the Taylor Rule) in the setting of monetary policy.The German Hyperinflation

1. Who is to blame for the German Hyperinflation?

We covered this in class. In addition to blaming the government and central bank governor, there is also an argument that the German extremists were to blame. There were extremists on the far right (Hitler) and far left (communists) and the government may have been trying to print money in an attempt to pacify them. Also you could argue that the Allies were to blame - the French, who were intransigent on reparations and occupied the Ruhr, and the US for not forgiving War loans. There is also a view that some German industrialists were to blame (e.g., Stinnes) who got access to cheap loans.

2. What were the consequences of the German Hyperinflation?

There are two categories of consequences: economic and political (e.g., undermining the regime). On economic, you could include the extreme volatility of relative prices, random redistribution of wealth and also that the savvy were able to take advantage of the situation whereas the not-so-savvy got their life savings wiped out (like the Fuhrer's story of the old lady selling her postcards).

3. What advice would you have given the German government about how best t to reduce the country's inflation in November 1923?

Examples include stopping increasing the money supply and cutting the budget deficit (reducing spending / increasing taxes) although you should also emphasize the possibility of reducing the reparation payments and renegotiating with the Allies.

1. What were the causes of Britain's "stop-go" economy? Did Mrs. Thatcher address them successfully?

2. What is the difference - if any - between "stop-go" in the 1950s and '60s and what Gordon Brown, New Labour's Chancellor of the Exchequer (i.e., Finance Minister) has called "twenty years of Tory boom and bust" under Mrs. Thatcher and her Conservative successors?. Do you believe that the policies implemented by Blair's New Labour government will finally abolish macroeconomic instability in the U.K.? What role - if any - would adoption of the Euro play in containing such instability?

1a. Which is of greater concern: poverty or inequality?
1b. Should we be concerned with rising inequality in the US?

2. How should business respond to rising inequality?3. What are the causes of higher inequality in the US? 4. What policy responses are appropriate? Can the US learn from others?4. What policy responses are appropriate? Can the US learn from others?What effect may large volumes of short-term portfolio flows have on exchange rate volatility?

1. What are the advantages and disadvantages to a country of having a fixed versus floating exchange rate regime?

2. What best explains the collapse of the Mexican currency: psychological factors or fundamentals?

Should Mexico be bailed out? How does your answer to this relate to your position of the earlier questions?

One approach to answering this question is as follows: if it is bad fundamentals in Mexico (e.g., political, social instability, bad banking system) maybe they shouldn't be bailed out (i.e., it's their own fault!). However if it's psychological factors on behalf of fund managers in New York who have suddenly lost confidence in a country that in fact is in pretty good shape, then maybe they should be bailed out (i.e., it's not the Mexicans that are to blame!). In this scenario it's the fault of the wild and unstable global capital markets.

Is Paul Krugman's analogy between the Mexican crisis and the ‘irrational exuberance' usually associated with tulipmania a good one?

This question again relates to the issue of whether the crisis is a psychological ‘bubble' bursting or is due to fundamental factors.