According to Menger, what is necessary for a thing to become an economic good,what happens if one of the conditions is absent?

Answer) According to Menger, the following are necessary for the thing to become an economic good:

Human need must be fulfilled by that thing

The thing must have properties for establishing the causal link between the need satisfaction and that thing

This causal link must have a recognition

Sufficient command of the thing is just so that it could be directed towards the satisfaction of a need.

If one of the above-mentioned conditions is absent, then the thing will not be a commodity in the market of sense, although consumer would have something useful.

1:Menger’s account of the origin of money is a classic in the economics literature.  Summarize Menger’s view on how money has come into being in various societies.

Answer) Menger thought that due to the wanting of the individual, money originated in order to minimize their transaction costs, when the markets, especially, were getting more innovative and specialized. It is realized by individuals that there are some commodities which are easy to be traded so he or she would keep the amount higher for that commodity. Eventually, everyone would be holding the commodity as the success of the traders would have been witnessed by them.

2. Suppose the following table depicts classes of wants in numerical order (I being the most pressing want, IV being the least pressing). Assume the unit price of all goods is $1 and that the individual can rank satisfactions and assign number indices to his satisfaction. If the individual has $22 to spend, how will he arrange his consumption among the classes of wants to maximize his satisfaction, and how much satisfaction will he obtain? Explain the principle this individual uses in reaching the solution.

                I               II             III            IV

                10           9              8              7

                9              8              7              6

                8              7              6              5

                7              6              5              4

                6              5              4              3

                5              4              3              2

                4              3              2              1

                3              2              1              0

                2              1              0

                1              0

                0

Answer) In this solution, the individual wants to maximize the satisfaction by using equilibrium principle of Menger. Maximum satisfaction of total 140 can be obtained by the individual by:

- 4 of item V

- 5 of item III

- 6 of item II

- 7 of item I

3. Suppose there are three unknown input values and three industry equations. On the left side of the following equations variables x, y, and z represent the productive inputs; the right-hand side of the equation shows the total value produced by the combined inputs. Determine the value of each input, using Wieser’s method of imputation.

(1)          2x + 2y = 200

(2)          4x + 6z = 580

(3)          8y + 10z = 1180

Answer)

4. Suppose there are eight buyers and six sellers of cows and that each trader values an additional cow according to the following subjective valuations:

Buyers  B1           B2           B3           B4           B5           B6           B7           B8

                260         240         220         210         200         180         170         160

               ----------------------------------------------------------------------------------------------------

                150         170         200         215         250         260

Sellers:   S1           S2           S3           S4           S5           S6

5:What is the exchange value (price) and how is it determined?

Answer) The exchange value (price) is any price less than 215 dollars but greater than 210 dollars. For instance, buyer B1, B2, and B3 are ready to buy a cow if the exchange value is 213 dollar and sellers S1, S2, and S3 are ready to sell the cow. If the value moves past 215 dollars then some other seller will be given the door to enter the market and the market eventually will be out of balance.

6. How are Böhm-Bawerk’s theories of capital and interest related?

Answer) Bohm-Bawerk stressed that introducing capital in the process of production would lengthen the process of production as well as increase output. Form his theory of capital, Bawerk develops the theory of interest. Amount of interest consisted upon the amount earned out of the capital usage and it was related to the total period of time involved in the process of production as well.

M5 - Review 5: Macroeconomics: Review Questions

Questions for the Review

Explain how adherents to Say's law explained the relationship between savings and investment and the behaviour of wages and prices.

Answer) At the level of full employment, aggregate savings and investment would be always equal. Generally, present consumption vs. future consumption is being preferred by the consumers, but given that saving is a reward for saving’s function, saving can be induced so that more assets could behold in the savings form if the rate of interest is good. The relationship between investment and interest rate is negative because the given investment’s productivity declines due to the increment increase in investment.

Moreover, the relationship between savings and consumption is negative which means high saving leads to less consumption. On the other hand, a decrease in consumption and the increase in investment would be matched. The wages and prices fluctuation with the change in investment and saving would smooth the transaction in the short run. The fall in prices would lead to production and increase and eventually high rate of employment.

What was Keynes’s criticism of Say’s law?

Answer) Keynes criticized the Say’s law because he thought that equilibrium of investment and saving would not be just a simple thing that solely depends on the rate of interest. Rather investment and saving are determined by the factors’ complex host in addition to the rate of interest, and the guarantee is not there that these would be equal at the economic activity level with full employment. Keynes also believed that labour unions and monopolies would thwart the wages and prices’ fluid movement.

According to Keynes, what is the investment multiplier and what is its ultimate impact, regarding equilibrium at full employment?

Answer) According to Keynes, the investment multiplies depends on the marginal propensity to consume. He believed that the chain of events was there that occurred after the investment’s initial injection. There are multiple parties that would trickle the money by consuming and saving the portions until it will be multiplied by the income. Moreover, Keynes believed that if levels and changes in income would be predictable then it would be accidentally only to be a full level of employment.

What did Keynes advocate to move the economy from an equilibrium at less than full employment to a full-employment equilibrium, and why?

Answer) Keynes suggested taxation and compensatory expenditures by the government so that relief could be given to under production and unemployment.

What is the liquidity trap and what does it imply about the effectiveness of monetary policy?

Answer) The liquidity trap occurs when the rate of interest is at its lowest level and investors are forced to withdraw from the market of bond because every investor would prefer to hold more and more liquid assets. At such a low level of interest rate, the further reductions in the rate of interest would not be able to induce the investment in capital through a bond market. This shows that monetary policy is not as simple as the original concepts of classical economists. In fact, the design of monetary policy works to change interest rate so that widespread unemployment and depression could be checked.

Keynes states in the Preface of his famous book The General Theory that the comprehension of his macroeconomic theory required the reader to escape from the older "classical" ideas.  Was Keynes's theory really a new theory?

Answer) Theories of Keynes did disprove so many beliefs of traditional economists regarding unemployment, investments, savings, and intervention of government. However, these ideas by the individuals were also found in the Hobson and Malthus’s writing. Keynes could make those ideas accepted widely so that it could be used in the policies of the government.

Explain Fisher’s expression of the quantity theory and the “Fisher effect.”

Answer) It is stated by the quantity theory of money that total expenditures in the money stock terms multiplied by its circulation or turnover rate, must be equal to the total expenditures in terms of the monetary transactions’ total volume multiplied by the latest price index. The two numbers on the sign’s each side must be identical. The equation of quantity theory of money is expressed as:

MV = PT

It was stated by the Fisher effect that real interest rate is equal to the difference between nominal interest rate and an inflation rate that is expected. The inverse relationship can be observed between inflation and the real interest rate unless inflation and nominal interest rate increases with the same level.  

Explain the process of adjustment following an increase in the stock of money using the real balance effect (assuming no initial change in price).

Answer) Process of adjustment is a process by which the surplus in the market cause the cut-back in the whole quantity that is supplied

How is Friedman’s restatement of the quantity theory of money like Keynes’s monetary theory and how is it different?

Answer) The demand for money is presented by Friedman as the permanent income’s function, the human’s proportion to the nonhuman wealth, expected charges in the change rate in the level of price, the nominal rate of interest, preference function for other goods vs money, and the actual level of price. The approach of Friedman is similar to the approach of Keynes except restatement of Friedman start with the basic capital price theory that income is harvest on capital. The income concept of both economists is different as Friedman considered income as permanent income and Keynes, in his short-term analysis, did not include the income. Friedman believed that cash balance demand is constant but demand for money is a predictable and stable function.

What is the difference between adaptive and rational expectations?

Answer) It is stated by adaptive expectations that a consumer forms the expectation on the past experience basis by considering inflation. While it is stated by rational expectations that a rational consumer forms the price expectations by considering all the available information including government policies and statistical values will form their decisions.

Summarize Arthur Lewis’s Nobel Prize lecture.  Be sure to address the terms LDC, MDC, and his views on the role of international trade in economic growth and development.

Answer) Arthur Lewis developed two unique economic models that significantly marks out the reasons that cause poverty among the nation of the countries that are being developed along with the multiple factors that determine the development procedures' unsatisfactory pace. He used the LDC referring to less developed countries and MDC referring to middle developed countries. He argued that the countries with small population should be specializing in the manufacturing and importing the products of food from another country that have an agricultural comparative advantage.

M6 - Review 6: Austrian Economics: Discussion Questions

Questions for the Review

What are the five main principles that distinguish the Austrian school from neoclassical economics?

Answer) Following are the five main principles that distinguish between Austrian school and neoclassical economics:

Methodological individualism

Casual-Geneticism

Radical Subjectivism

Methodological Essentialism

Purposive Human Action

According to Schumpeter, what is the primary agent of economic development? How does economic development relate to competition and “creative destruction”?

Answer) Schumpeter believed that entrepreneurs were the main economic development’s agent and competition is the process between these agents of economic development that mainly involves entrepreneurs’ dynamic innovations. Furthermore, he believed that development has been the disturbance of productions’ and distributions’ circular flow that occurs in commercial as well as industrial life but not in the consumption.

Explain Schumpeter's definition of the entrepreneur as an innovator.

Answer) Schumpeter believed that the dynamic entrepreneur would either make new combinations or innovate in the production of the goods. Being the innovator entrepreneur, he meant: creating a new production method, creating a new quantity of good or new good, capturing the new supply source, opening a new market, or industry’s new organization.

How do the neoclassical and Austrian notions of profit differ?

Answer) Alfred Marshall and some other neoclassical economists believed profit as the payment for the ability of business. Mill along with some other writers believed that profit basically is the superintendence’s wages. Profit was the rent for the ability for Marshall, he considered more appropriate because, in supply, the talents of entrepreneur are limited and unique individual to individual who is able to shrewd judgement and exercise imagination.

Compare and contrast the Austrian theory of money with Friedman’s (from Ekelund and Hebert, Ch. 21) monetary theory.

Answer) According to Friedman monetary theory, It is stated by the quantity theory of money that total expenditures in the money stock terms multiplied by its circulation or turnover rate, must be equal to the total expenditures in terms of the monetary transactions’ total volume multiplied by the latest price index. The two numbers on the sign’s each side must be identical. Austrian school agrees with this theory on most of the points but the main disagreement of Austrians is that how money actually works. Friedman believed that it is helpful if the government controls the money as it smooths the economic cycles while Austrian believe that economic cycles are actually caused by the government intervention so the better choice is to shut the Fed down and use the gold standard rather.

Explain the “Austrian theory of the trade cycle.”

Answer) The “Austrian theory of the trade cycle” is about how the trade cycle occurs. The theory sees the trade cycle as the excessive growth’s consequences due to the rate of interest that is artificially low by the fractional reserve banks or central bank in bank credit. It is believed by proponents that the sustained period of excessive credit creation and low rate of interest results in unstable as well as a volatile imbalance between investments and savings.

The Austrian economists Ludwig von Mises and Friedrich Hayek were staunch critics of socialism.  From Mises’s and Hayek’s perspectives, explore the problem of socialism from the economic and political points of view.

Answer) Mises and Hayek’s perspectives are the critical examination of socialism that is famous for penetrating argument of economic calculation of Mises. The impossibility of socialism has shown and capitalism has defended against it. Some other economic form cannot be substituted in the centrally planned economic system for the price of the market, because such alternatives do not even exist.

Explain Hayek’s distinction between the different kinds of knowledge.  How does the problem of knowledge factor into the practicality or impracticality of socialism?

Answer) Sensible allocation of scarce resources was pointed out by Hayk that requires knowledge to be dispersed among the nation, without a group or individual as the experts able to acquire it all. It is required for informed decision making to allow people to act accordingly to the available information of place as well as time while providing the communication system that motivates. Market price and market exchange generate the motivation and information.

Analyze in detail Ludwig von Mises’s view of J.M. Keynes and the Keynesian economic theory.

Answer) James Maynard Keynes is hailed commonly as one of the greatest economists of the time, but Ludwig Mises challenged his ideas specifically about the Great Depression in the United States. The great depression was predicted by both of these economists. It was argued by Hayek that interfering with forces was futile for the government while Keynes stressed that government intervention is really helpful and necessary. The prediction of the great depression was the main common thing between both of them.