Introduction to Macro-Economics: The Big Picture-CASE

The Two Branches of Macro-Economic Theory Thinking like a Mac ro-Economist: John Maynard Keynes and Milton Friedman The United States is a capitalistic economic system but other have and currently do exist. Below is an amusing look at some comparative economic systems: Feudalism: You have two cows that your feudal landlord owns. Your landlord takes some of the milk and lets you have the rest. Communism: You have two cows. Your neighbors help to take care of them and the government tells you how much milk you can produce. You all share the milk. Dictatorial control: You have two cows. The government takes them both, denies they ever existed, then drafts you into the army. Milk is banned. Capitalism: You have two cows. You sell one and use the proceeds to buy a bull. Your herd multiplies, you sell them, and then retire. Macro-economics is perhaps the most divisive area of economics when applied to political decision making, and macro-economists divide themselves into different schools of thought. Two of the biggest camps are the Keynesians and the Monetarists. Keynesians and post-Keynesians follow the theories of John Maynard Keynes, the most-celebrated economist of the 20th century who proposed that government stabilize the economy with the use of fiscal policy. Monetarists, on the other hand, follow the teachings of Friedrich Hayek. For this assignment do some research on the ideas of Keynes and Hayek. Focus on the “big picture” of what their main ideas are and how they have influenced policy makers. Then write a 3 to 4-page paper addressing the following questions: 1. The Circular Flow diagram is model of how the economy works. Explain how the model would change if the following events ocurred: a. Households increase savings. b. Drastic spending cuts are implemented by the government. 2. The online textbook identifies three types of economic systems, which one closely resembles the US economy. Explain and support your answer. 3. Discuss the policies that Keynes and Hayek advocated regarding how the federal government should manage the economy. What are the major differences between each school of though. 4. Based on your answer to question #3, which of the two economists would you agree with more? Explain. Case assignment expectations: Use information from the modular background readings as well as any good quality resource you can find. Make sure you cite all resources you use and provide a reference list at the end of your paper. LENGTH: 3-4 typed and double-spaced pages. In addition to the overall quality, depth, grammar, and organization of the paper, the following will, in particular, be assessed: 1. The level of your understanding of the key concepts that make the two economists both similar and dissimilar. 2. Your ability to apply the theory by analyzing past and current economic actions as given in question 2. 3. Some in-text references to modular background readings (APA formatting not required).