Seminar Questions

SEMINAR QUESTIONS 1
ECONOMICS
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SEMINAR QUESTIONS 2
Question1
It is easy and simple to understand the model since it gives the IS and LM curves and this makes
the model attractive. The model limits some functionality in the economy since it can’t formulate
how taxes and spending policies are being handled and it gives little on other major pillars of
macroeconomics such as inflation, international markets and lack of capital formation and labor
productivity (Young and Zilberfarb, 2012). This explains why the model became less favored.
Question2
Yes. The Keynes theory of recessions is downward rigidity of nominal wages for which there
seems to be good evidence. When the economy is in recession restoration of full employment
involves reducing real wages by increasing the aggregate demand and increasing prices in
relation to wages. The followers of Clower and Leijonhufvud raised the issue of cutting the
wages but Keynes had a belief that workers involve exhibition of “money illusion”. This,
therefore, means that workers are ready to accept the reduced real wage which is required to
restore full employment. This only applies if the reduced real wages are achieved by increasing
prices, but not the reduction of money wage (Laurent and Cacheux, 2014).
Question3
The argument of real balance is against the Keynesian economic theory as it cites that deflation
periods resulting from decreased aggregate demand would be more self-correcting (Woodford,
2011). This would cause an increase in wealth; causing expenditures to rise and thus correcting
the drop-in demand. The effects of real balance can be strong enough to challenge government
policies of fighting environment. This is due to the fact once total demand for a country goes