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Why did Friedrich Hayek call expansionary spending dangerous? 
 
(i) He felt it could lower the money supply and cause deflation.
(ii) He felt it could lead to inflation and poor decisions by consumers.
(iii) He felt it could lead to deflation and poor decisions by consumers.
(iv) He felt it could lower available credit and cause a drop in prices. 
 

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Tod Thiel
Tod ThielLv2
14 Feb 2020

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Related questions

1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

Question 2

  1. For any given expected inflation rate, short-run aggregate supply curves show the relationship between

    the money supply and growth rate of output.

    inflation and growth rate of output.

    production factors and wages.

    inflation and wages.

1 points

Question 3

  1. Why is the SRAS curve steeper above its intersection with the Solow growth curve?

    Wages are stickier in the upward direction.

    Wages are less sticky in the upward direction.

    Lower inflation will lead to faster growth.

    Employees become less motivated to work during times of unexpected inflation.

1 points

Question 4

  1. What factors triggered the Great Depression?

    decreased consumer spending and tight monetary policy

    decreased investment and increased inflation

    decreased employment and increased money supply

    decreased inflation and increased income taxes

1 points

Question 5

  1. How might changes in the money supply be non-neutral in the short run?

    As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.

    When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.

    As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.

    If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

1 points

Question 6

  1. For a given nominal interest rate, an increase in deflation will cause the real rate of interest to

    remain relatively constant.

    increase.

    decrease.

    become unpredictable.

    Question 8

    Which of the three price indexes measures the average price level of the largest total number of goods?

    the consumer price index

    the GDP deflator

    the producer price index

    Each price index accomplishes the same task.

    The textbook uses the

AN ETHICAL DILEMMA*

Steven, a junior at Northeast State, just started working part-time at a local fast food restaurant chain. Although not his dream job, it paid for tuition and books, and the restaurant gave him the flexible schedule he needed for school. After a few months, Steven found he got along well with all of his coworkers, but it was apparent they did not respect the company or the management. The employees made fun of their bosses and treated the work area like a playground. In some respects, Steven thought it was a fun environment to work in, especially after hours when management was gone for the day. They played their music loudly, laughed, and talked with one another during the down times instead of cleaning up their work areas like they were supposed to. Despite the fact there were ethical policies telling employees how they were expected to act in the workplace, these policies never seemed to be enforced. One day, while working with his coworker Julie on the food assembly table, Steven saw Julie accidentally drop a meat patty on the floor. Without so much as a flinch, she bent down, picked up the patty, stuck it back on the bun, and wrapped it up. It happened so fast that Steven wasn’t even sure he had seen right—especially since Julie had done it so casually. Steven watched in dismay as another worker took the hamburger out to the customer. Over the next few weeks, Steven saw others, including the shift supervisor, do the same thing with burgers and other products. Once, an entire cheeseburger hit the greasy floor, was picked up, and was taken to the customer. This time the customer complained the burger tasted funny and sent it back. Steven noticed other unsanitary practices such as employees not washing their hands between handling meat and vegetables and not washing utensils between uses. Obviously, such practices were against company policies and, if reported, the supervisors in charge could get in trouble and the restaurant would face investigations from the health department. However, there was ample opportunity for things like this to occur. There was no one watching them, and the shift supervisor also engaged in these activities. Steven felt it was the company’s responsibility to hire good people, so they were to blame if these things happened. One day, Steven approached Julie and asked, “Why do so many people here serve food that has fallen on the floor to customers?” Julie thought about it briefly as though she had never considered it before and replied, “I guess it’s because it would take too much time to get another beef patty out of the freezer, cook it, and serve it to the customer. This is a fast food restaurant, after all, and I’m not interested in hearing customers complain about the time it takes for them to get their food. Besides, the restaurants with the fastest service get a bonus from corporate headquarters. Last year the supervisors rewarded us with some extra money for doing our jobs so quickly.” Steven was somewhat taken aback by the honest reply and asked, “Wouldn’t you be disgusted if you were served dirty food at a restaurant?” This time Julie’s response was quick. She said, “What I don’t know won’t hurt me.” She walked off. Several weeks went by and the same practices continued. Steven became more and more concerned about the consequences that could happen in an environment so laid back and unconcerned about safety and health. It seemed like the more time that passed, the worse everyone’s attitude became. One day, at the beginning of his shift, Steven noticed the walk-in freezer had been left open. As he went to shut the door, he discovered a smell of rotten meat. It almost made him vomit. “How could this happen?” he wondered. He threw away the rotten meat without asking anyone because he was afraid of what the answer might be. After Steven threw out the spoiled meat, he began to wonder how the culture of the restaurant got to the point of supporting such practices. He realized the seemingly minor unsanitary practices allowed major issues to arise that could possibly hurt someone. Steven felt he should say or do something, but to whom? He sat down and pondered what he should do.

QUESTIONS | EXERCISES

1. Describe the nature of the organizational culture in the restaurant. What kind of opportunities are there for unethical behavior to occur? Are there any opportunities for ethical behavior?

2. What are some of the incentives employees might have to engage in this type of behavior?

3. If the organizational culture of the restaurant does not change, what are some likely outcomes and consequences?

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