A teacher passes out an individual assignment to his students. Some students immediately understand the assignment and are able to complete the work while many more students are clearly struggling. The teacher has two options: 1. Stop the class, give additional direction, and help lead students through the lesson. or 2. Allow the students to continue to struggle until they get it and tell them it’s homework if they do not finish on time. Choose one option. Explain, in detail, why you chose this option. Explain yourself in at least four sentences. Response Question11/4/13

Foundations of Modern Economic Theory

Defining Recession and Depression Recession: a decline in real (adjusted for inflation) GDP two straight months. Depression: A much broader, deeper and more sever recession. Example: during the Great Depression in the 30’s GDP dropped 33 percent and unemployment up to 25% in the biggest recessions of the 1900’s from GDP dropped 3% and unemployment to 9%

Classical Economics Based off off the belief from the 1700’s that markets right themselves if left alone (Adam Smith) Also the belief, called Say’s Law: that supply creates it’s own demand. Savings are a good in that they help prepare for the future.

Background on The Great Depression Prior to the Great Depression things were “good”, people had money (credit) and there was little regulation. The stock market crash and subsequent depression changed this, people lost savings, homes, jobs, GDP dropped dramatically. The people needed an alternative to the way the economy had been working.

Keynes Steps in John Maynard Keynes was a British economist who felt that it was the governments responsibility to take control of the economy during the Depression. The markets could not right themselves, they needed intervention through government spending and regulation. The masses of unemployed and starving during the depression liked this idea, as did FDR who put it into action.

What did Keynes say? Opposite of Say’s Law, that Demand creates Supply Savings should be spent to stimulate the economy The economy can be controlled Government should go use deficit spending (debt) to create jobs and create demand During bad times pump more money into the economy, bail out businesses X = Demand

Influences of Keynes New Deal Programs Expanded powers of the Federal Reserve Bank which regulates money and interest rates Great Society Programs

Who is Frederick A. Hayak? F.A. Hayak was an Austrian economist but immigrated to England who would further and solidify Classical theory. He felt the market was too complex to control, government control of interest would lead to false capital and a “Boom and Bust Cycle”

The debate He and Keynes battled directly during the 30’s and 40’s until Keynes death. But the government stuck with Keynes model.

Who is Ayn Rand? What are her ideas? Why are they becoming more popular now? Ayn Rand Why do her ideas go against “American Ideals?” F.A. Hyak What was his book “The Road to Serfdom” about? What things created a new interest in Hyak and “The Road to Serfdom”? Why is Hyak being embraced by Conservative politicians these days? why would this concern Hyak himself?