Economics: Seminar Questions and Answers - Week 10, IS-LM Model

This document presents answers to seminar questions related to macroeconomic concepts, particularly focusing on the IS-LM model and Keynesian economics. The assignment addresses the attractiveness and limitations of the IS-LM model, exploring why it has become less popular over time. It delves into the debate surrounding wage rigidity and its significance within Keynesian economics, examining the relationship between nominal wages, real wages, and unemployment. The document also analyzes the real balance effect and its implications for government policies aimed at combating unemployment. Furthermore, it evaluates the perspectives of Keynesian critics, including the Post-Keynesian School, and their arguments against the neo-classical consensus. The document explores the relationship between micro and macroeconomics and the role of monopolies in determining demand and prices, as well as the monetarist view on inflation. Finally, it considers the financial instability hypothesis and its application to the Greek debt crisis, providing a comprehensive overview of key macroeconomic theories and debates.

SEMINAR QUESTIONS 1
ECONOMICS
Student Name
Institutional Affiliation
Facilitator
Course
Date

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

SEMINAR QUESTIONS 3
down, people even the unemployed feel rich enough and able to sustain their lives. This gives
them the notion of no need of straining thinking they can challenge the vices in unemployment.
Question4
The convincing is not high since Davidson fails completely to show how genuine insights are
represented by the supposed discoveries. He instead focuses on the worst ideas of Keynes. From
the "National Self-Sufficiency"-1933 article (Boyle, 2015) that most followers of Keynes's tend
to forget, Davidson is viewed to have very little utilization of free trade. No way can be taken to
carry out an empirical analysis about their point of view since the future is in fact radically
uncertain.
Question5
Yes, Kalecki was right in that monopolies make their own prices which highly determine the
level of demand. Micro and macroeconomics are related since their general trends sometimes
affect one another. Sometimes the trends are opposite completely. Generally, the trends of either
are reflected in the trends of another but their reflection scale may differ sometimes. The
macroeconomics analysis is founded by microeconomics.
Question6
“The monetarist view that inflation is a monetary phenomenon operating through demand is
more convincing”. The rate of increase in the supply of money in the economy is similar to the
rate at which inflation increases. In this analysis, the aggregate supply has been assumed to be
constant and employment is assumed to be full in the economy. It also shows that micro and
macroeconomics go hand in hand in most of the economic factors.

SEMINAR QUESTIONS 4
Question7
It is convincing since it reviews the main aspects of Minsky's concept, comparing with
competing approaches and, most importantly, taking the Greek debt crisis as an application. It
then attempts to prove that the financial instability hypothesis provides the best explanation for
the reason why Greece is now in a state of default.

SEMINAR QUESTIONS 5
References
Boyle, D., 2015. The Money Changers: Currency reform from Aristotle to e-cash. Routledge.
Laurent, E. and Le Cacheux, J., 2014. Fruitful Economics: Papers in Honor of and by Jean-Paul
Fitoussi. Springer.
Woodford, M., 2011. Interest and prices: Foundations of a theory of monetary policy. princeton
university press.
Young, W. and Zilberfarb, B.Z. eds., 2012. IS-LM and modern macroeconomics (Vol. 73).
Springer Science & Business Media.