econ hmwk

econ hmwk - 1. Contrast the views of Keynes with those of...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1. Contrast the views of Keynes with those of the Classical economists about the nature of and remedies for business cycles. Be sure to include the role of wage and price changes. ANSWER: The classicals and Keynes differed in several respects. The classicals felt business cycles were not common or serious because market economies are inherently stable. In the event of a recession, wages and prices would fall so that output would be sold and people would be hired. This self-correcting mechanism depended on flexible wages and prices. Government intervention in the economy is not necessary or desirable. Keynes believed that market economies were inherently unstable, and that prices and wages are not flexible, which leads to long and painful recessions. Keynes believed that government intervention was necessary to return the economy to full employment in a reasonable period of time. 2. What is the marginal propensity to consume (MPC) and why is it important in predicting consumer behavior? ANSWER: The marginal propensity to consume is the ratio of the change in consumption spending to the change in disposable income. The value of the MPC typically is less than one because when consumers receive an increase in income, their spending does not increase as much as income. For the United States, statistical estimates yield an MPC of approximately 0.90. If one knows the MPC, then predictions can be made of how much consumer spending will increase when disposable income increases by a certain amount. This is especially useful with regard to tax changes. If the federal government intends to increase aggregate demand through decreasing taxes, then knowing the MPC is necessary. For example, if the desired increase in consumer spending is $450 million and the MPC is .90, then taxes must be reduced by $500 million. 3. Why did President George W. Bush feel the need for a stimulus package for the U.S.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/26/2008 for the course ECON 203 taught by Professor Al-sabea during the Spring '05 term at USC.

Page1 / 3

econ hmwk - 1. Contrast the views of Keynes with those of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online