- J.M. Keynes in The General Theory of Employment, Interest and Money said, “…the propensity to consume and the rate of new investment determine between them the volume of employment (in an economy).” (a) How was this different from the Classical theory that prevailed before this? (b) What did Keynes focus on that completely revolutionized economic thinking forever? Use the Keynesian Cross diagram or the GDP equation to explain your answer. (c) Finally, explain briefly why Keynes’s theory and particularly his policy is even more relevant than ever before in today’s Covid-19 induced worldwide recession.
750-800 words plus diagrams. 20 marks.
RUBRICS: Quality of Research 20%; Content/Argument/Reference to Theory 70%; Style/Presentation/Layout 10%. - Choose to write on ONE of the following:
a) You are the central bank Governor of the country of Syldavia. Syldavia is facing rampant inflation running at 15% per year. The President of Syldavia, who never took Econ201, asks you to propose a policy that will lower inflation. Explain in a letter to the President what steps you propose to take and why. Start with a Phillips curve of the Syldavian economy at present, describe your policy clearly and in detail and how it will work and then show the effect of your policy using AS/AD analysis. Finally, show the President what the economy will look like after the policy has taken effect by means of a Phillips curve. End with a conclusion describing the trade-off Syldavia would have to accept. (30 marks)
Sample Solution
