Set 1

 

Bell: Models and Reality

1.     Compare and contrast the classical and neoclassical theories. Also, what innovation(s) of the neoclassical economists made it possible to approach Economics as a science?

2.     What is methodological individualism? Explain and give a counterexample of its use as a basis in economic theory. How does this principle relate to representative agent models and the focus on the exchange process in modern economic theory?

3.     The classicals and neoclassicals make much of the way the market processes work to produce optimal outcomes without central control, and the best of all possible worlds. Explain this, specifically discussing the following:

(a)  What is the equilibrating mechanism between markets? How does this coordinate econ­o­mic activity?

(b)  Define “consumer choice” and “consumer sovereignty.” In what sense is the consumer given “choice” and “sovereignty” in the (neo)classical econ­omy?

(c)  Under what conditions is the general equilibrium Pareto Optimal? Why is Pareto optimality more appropriate to macroeconomic debates than the utilitarian “greatest good for the greatest number?”

4.     What is Say’s Law and what are the arguments given to support it? Why would it obtain in a neoclassical economy. Specifically, what are the assumptions of Say’s Law?

5.     What are the similarities and differences between Marshall’s neoclassical theory and Walras’ neoclassical theory?

6.     Bell discusses “four bridges” from economic theory to actuality. Discuss each and explain how they restore faith in the Econo­mics orthodoxy. Specifically:

(a) Bell argues that the quantity theory was macroeconomics before Keynes. Explain this position in terms of the aggregate-supply/aggregate-demand apparatus with which we are (presumably) familiar?

(b)  What is imperfect competition and what are its implications for macroeconomics?

(c)           According to Bell, what were the central arguments of Keynes’ General Theory? Why do you think that these arguments were revolutionary to the neoclassical economists of the period?

(d)  What is the importance of the Phillips Curve to macroeconomic modeling? What do we mean when we say it provides the “missing equation?”

7.     What are two specific assumptions about human behavior and the social setting of modern macro­economic theory? How are these assumptions challenged by various economists?

8.     What elements does Bell believe are necessary to an interpretative economic theory? Why? What does he mean by an interpretive theory?

 

Hahn: General Equilibrium

1.     What are the assumptions necessary for equilibrium? Discuss these assumptions and explain the significance of each. For example, which assumptions are especially related to the uniqueness of the equilibrium? Which assumptions are especially related to ensuring Pareto optimality? Why? What kinds of questions cannot be addressed by general equilibrium theory? What are some of the inconsistencies in general equilibrium theory?

2.     What is equilibrium? Discuss the competing definitions, highlighting the differences between dynamic and static contexts. In what sense is “temporary equilibrium” a hibred construction, allowing period to period market clearing and dynamic adjustments?

3.     In what sense is general equilibrium Pareto optimal? Why is this different from saying that the general equilibrium is socially optimal?

4.*   What purpose does the invocation of the rational expectations hypothesis have? What problems does it solve? When does a rational expectations equilibrium obtain?

 

Visions, Ideologies, and Distributive Justice: Lecture on the Foundations of Political Economy

1.     Identify and contrast economic “liberal” and “conservative” viewpoints according to their differing prespectives on:

(a)  Whether the individual or society is more important

(b)  Distributive justice

(c)  Private property

(d)  Vision (according to the framework given by Thomas Sowell)

(e)  Central planning

(f)   Markets

2.     One possible system of categories for organizing and making sense of the variety of economic (and political) ideologies relies on differences in notions about distributive justice.

(a)  Contrast the “end-state” and “process” approaches to distributional justice. How are these related to liberal and conservative ideologies, and the various schools of macroeconomic thought?

(b)  Discuss the Rawls-Nozick debate, and explain its relationship to the older, continuing debates regarding income distribution and government intervention.

3.     Discuss John Rawls’ A Theory of Justice as an attempted compromise between those who advocate end-state justice and those who advocate process justice. Specifically, what principles does Rawls argue must be determined when people set up a social, political, and economic system? What choices does Rawls argue that people in the “original position” will make with regard to these? Why?

4.     Robert Nozick, in his Anarchy, State, and Utopia, argues the end-state theories of distributive justice are fatally flawed. He argues that only a theory of justice that focuses on entitlements and property rights is viable.

(a)  What are Nozick’s arguments? In what ways is Nozick’s approach consistent with classical liberalism and the neoclassical vision?

(b)  Nozick argues that only the entitlement approach is “natural,” and that history demonstrates that redistribution is inconsistent with personal freedoms. Explain.

(c)  What criticisms of Nozick’s theory can you offer?

5.     Identify and discuss liberal, socialist, conservative, classical liberal (libertarian) and totalitarian ide­ol­ogies in terms of the assumed appropriate roles of government in markets and social choices. Explain carefully.

6.     How does Thomas Sowell identify the constrained and unconstrained visions? How are these different world visions related to the economics of liberals, socialists, conservatives, and libertarians?

 

Lectures on Classical/Neoclassical Economics.

1.     What are the assumptions of the neoclassical model? How might these assumptions affect the outcomes predicted by the model? How do the assumptions limit analysis with the model?

2.     Derive the labor supply and demand curves from the optimizations of households and firms. Construct the labor market, and discuss the resulting market equilibrium. Show that the labor demand curve is downward sloping and the labor supply curve is upward sloping. What is the nature of unemployment in the classical/neoclassical model? How do the classicals and neoclassicals explain prolonged, widespread unemployment? Short-run unemployment?

3.     Discuss and mathematically analyze what the neoclassical theory tells us about the choices firms make in optimizing profits. Discuss their investment and employment decisions. Show that the labor demand function and the investment demand function are downward sloping. What is the neoclassical theory of investment? What is the neoclassical theory of income distribution?

4.     Discuss and mathematically analyze what the neoclassical theory tells us about the household’s optimization regarding labor supply and saving-consumption. Show that the labor supply curve is upward sloping and the saving curve is upward sloping.

5.     Discuss the saving-consumption decision in the neoclassical model. What decision process does the interest rate (as the independent variable) attempt to capture? How do agents in the neoclassical model determine their consumption?

6.     In what market are interest rates determined in the neoclassical model? Explain this market and the meaning and significance of interest rates in this model. What does it mean to say that the neoclassical theory of interest is a real theory of interest? What is the Wicksellian natural rate of interest?

7.     What is Walras’ Law? What is Say’s Law? Are they the same?

8.     Explain the concept of an aggregate production function. How would the production function be affected by an increase in the average and marginal productivity of labor for a given output level, as a result, for example, of increased education of the labor force? Graphically demonstrate how such a shift in the production function would affect the levels of output and employment in the neoclassical model.

9.     Using a simplified version of the neoclassical model, use the method of total differentials and comparative statics to discuss the effects of changes in the capital stock on employment, output, and wages. Under what conditions do employment and real wages increase? What is the benefit to increasing the capital stock?

10.   Discuss the complete neoclassical model and its solution. Discuss the logic, the functional relations, and provide a graphical analysis.

11.   What are the major determinants of output and employment in the neoclassical system? What is the role of aggregate demand in determining output and employment? Discuss and demonstrate graphically the futility of monetary and fiscal policy in the neoclassical model.

12.   What is the neoclassical “veil of money”? Explain and contrast money neutrality and the dichotomy of money. What is the role of money in the neoclassical model?

13.   Classical and neoclassical economists assume that velocity was stable in the short run. But suppose that, because of a change in the payments mechanism, for example the greater use of credit cards and credit lines, there was an exogenous rise in the velocity of money. What would be the effect of such a change on output, employment, and the price level in the classical/neoclassical model?

14.   According to the neoclassical model, what are the effects of an increase in government spending? Consider this when the spending is (a) financed by taxes, (b) financed by bonds, (c) financed by money creation.

15.   Using the neoclassical model, discuss the effects of a supply-side tax cut. Give a complete graphical analysis and explanation.

16.   How does the neoclassical model hold up to empirical scrutiny? Discuss, for example, the work by McCandless and Weber on the matter. Does, in fact, the quantity theory hold in real-world economies?

 

FRIEDMAN: “The Quantity Theory”

 

1.     Friedman describes three approaches to the equation of exchange that are still commonly discussed in the literature: the transactions form, the income form, and the Cambridge cash-balance form. Identify and discuss these three forms of the equation of exchange, and the different conceptions of the roles of money that each involves. Why does one approach lead to the mechanical aspects of the payments process, while another leads naturally to notions of money demand?

2.*   Discuss the factors determining the nominal supply of money and its relationship to high-powered money. Is it possible to exogenously change the real quantity of money?

3.     What factors affect the demand for money by wealth holders? By firms? Contrast the factors for these two groups.

4.     According to Friedman’s interpretation of the quantity theory, the Phillips curve is theoretically flawed. Explain the flaw. How does an understanding of this flaw lead to an expectations-augmented Phillips curve?

5.     Describe the quantity-theoretic money-income transmission mechanism. Based on the empirical evi­dence, what are the relevant lag-lengths? How would you explain these lag-lengths?

6.     What are “first-round” and “second-round” effects, and how are they related to the theory of the monetary transmission mechanism? How are these effects viewed differently by quantity theorists (neoclassicals) and Keynesians? In other words, how does Friedman use these concepts as a way of contrasting the differences between Keynesians and quantity theorists? What is the Cambridge effect? What is the Keynes Effect (transmission mechanism)?

7.     Discuss Friedman’s empirical evidence regarding the quantity theory. Specifically, give his “long and variable lags” timeline regarding the effects of changes in the money supply on the economy.

 

Keynes and Keynesian Economics

1.     Keynes is often said to have begun a “revolution” in macroeco­nomic theory. What basic elements of his vision, his insight, and his methodology are revolu­tionary? Explain these elements by comparison with the neoclassical vision, methodology, and vision.

2.     Why does the use of money in an economy make it impossible, in the general case, for economic agents to make their transac­tions based upon underlying real values? Why is every transac­tion a speculation in a monetary economy? In what ways is the production process even more of a specula­tion than simple exchange transactions with money? How is this exacerbated by the introduction of manufactured capital goods?

3.     What problems does Keynes point out with aggregation? Give examples of the fallacy of composition in the discussion of macroeconomic aggregates, and explain the significance of each. In what ways does Keynes disaggregate?

4.     Some have argued that microeconomics focuses on allocative processes and relative price decisions, whereas Keynes’ theory is a recognition that all of the activities in the macroeconomy are not regulated by allocative processes. Explain this perspective.

5.     Keynes argues that the neoclassical aggregate labor market is defined by two basic postulates. These two postulates, along with Say’s law, define the classical model. State and discuss these two postulates and Say’s law. How do these relate to the allocative nature of the aggregate labor market? How does Keynes challenge these postulates?

 

Keynes on Production

6.     How does the time involved in the production process affect the employment decisions by firms and their interest in recontracting? Does Keynesian unemployment depend upon a violation of the perfect competition assumption of the neoclassical model?

7.     Keynes’ model contains two productive sectors, producing wage goods (consumption goods) and capital goods. Why is this important to the Keynesian model, and how does it contribute to his argument? How does Keynes use the differences between these two sectors to construct asymmetric responses to inflation to demonstrate involuntary unemployment?

 

Keynes on the Labor Market

8.     In what ways does the introduction of money into an economy affect the behavior of labor-supplying agents? How does Keynes use asymmetries in the behavior of these agents to justify nominal wage stickiness and involuntary unemployment?

9.     What is Keynes’ view of the labor market, and how does it differ from the neoclassical view? How does he reconstruct the supply-demand apparatus for his market? How does Keynes define involuntary unemployment?

10.   In what sense is the labor market “unbalanced,” in the sense of workers and firms enjoying unequal market power? How is this reconciled with the fact that the labor market is considered competitive by Keynes?

11.   Keynes constructs arguments in support of wage stickiness. One of these has to do with asymmetric responses to real wage changes by workers; what is this argument and how does he justify it as a rational response? Can labor choose to achieve full employment by altering its real wage?

 

Investment and the Capital Market in the Keynesian Model

12.   Contrast Keynesian and neoclassical investment theory, and discuss the relationship of each to money. What is the marginal efficiency of capital? How might the marginal efficiency of capital collapse during a recessionary period and contribute to a downward spiral of (un)employment and output?

13.   What arguments does Keynes offer to support his position that inadequate investment is the source of deficient effective demand? What is effective demand, and how does it differ from notional demand? What is the linkage from here to employment? That is, how does inadequate investment arise and then result in unemploy­ment in Keynes’ model? Explain.

14.   What are the implications of Keynes’ shift from real analysis to monetary analysis in his capital theory? How is the interest rate determined in the Keynesian model? Relate this to liquidity preference and investment.

 

Keynesian Monetary Theory

15.   In what ways is Keynes’ Liquidity Preference Theory a natural step in the evolution of the Quantity Theory through the Fisher, Income, and Cambridge Cash-Balances approaches? In what ways is Keynes’ Liquidity Preference Theory consistent with the rest of his theory?

16.* In what sense(s) do uncertainty and the demand for money as a store of value arise together? Why would someone rationally hoard money? (See Keynes & Viner, QJE, 1937)

17.   Keynes challenges money neutrality in many fundamental ways. What are they? How do they relate to his central issue of unemployment?

18.   Explain the Keynes Effect (money income transmission mechanism).

 

Refuting Say’s Law — Other Arguments to Explain Unemployment

19.   What structural relations does Say’s law require to hold in a monetary economy? How does Keynes refute Say’s law?

20.   Discuss Keynes’ version of the “Keynesian Cross” (aggregate expenditure model), its assumptions, and the way that it collapses to the undergraduate textbook model. How is this a refutation of Say’s law?

21.   What is the “investment trap”? What is the “liquidity trap”? How does each provide a plausible explanation for unemployment?

22.   Keynes offers a number of theoretic arguments to justify persistent, widespread unemploy­ment. Some of the arguments even obtain when agents make no expectational errors, and prices and wages are per­fectly flexible.

        a.  What are these arguments?

        b.      How does each relate to deficient demand?

        c.  Discuss Keynes’ analysis of the policy options in each case.

 

Hicks’ “Little Apparatus”

23.   What aspects of Keynes’ model does Hicks emphasize? Which aspects does he ignore? Is it a complete depiction of the Keynesian system?

24.   Discuss the Hicks Model, and contrast it with the (neo)classical model. What further generalization does Hick suggest?

25.   Why does Hicks call Keynes’ theory a “General Theory of Economic Depression”?

26    What is relationship between Keynes’ Model and Wicksell’s theory does Hicks point out?

27.* Why do you think that Hicks’ expression of the Keynesian model has prevailed when others, like the Meade model, have fallen by the wayside? Why is Hicks’ model so attractive? Why is he so persuasive?

 

Textbook Keynesian Economics: IS-LM

28.   The following is a simple Keynesian model:

        S(Y) = I(i) + G

        M/P = L(Y,i)

        With G exogenous and M/P constant, derive mathematical expressions describing the effects of a change in government purchases of goods and services (G) on income (Y) and interest rates (i). How would the effects of G on Y differ in the classical case?

29.   Using a linearized Keynesian model, solve for IS and LM. Discuss the IS and LM “curves,” their slopes and intercepts, and the way that they respond to changes in money supply, prices, government expenditures, etc. Explain the paradox of thrift.

30.   Using the IS and LM curves show graphically and explain the major factors in determining the effectiveness of monetary and fiscal policy. Explain the impact on fiscal policy effectiveness of an economy moving entirely away from currency and to a monetary system in which all purchases could be purchased with plastic cards that approved withdrawals from interest-bearing bank accounts.

31.   Explain the Keynesian model graphically. Include labor, production, aggregate supply and demand, IS-LM, and whatever else you need to close the model. Be sure to show how aggregate supply and demand are derived by the other elements of the model.

32.   Show why deficit spending by government is a more powerful policy tool than balanced-budget spending. Derive the expenditure multiplier and balanced-budget multiplier and compare.

33. Mathematically derive the signs of the slopes of the IS and LM curves. Also explain the slopes graphically.

34.   Using the complete Keynesian model, discuss the effects of an increase in the money supply by the central bank.

35.   Using the complete Keynesian model, discuss the effects of an increase in government deficit spending.

36. Mathematically analyze the comparative statics of a Keynesian model. (Model provided.)