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| | Look again at its cost. What is your best decision? Don’t buy it. | | Look again at its cost. What is your best decision? Don’t buy it. |
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| − | {{Economics_Lectures}}
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| − | We’ve covered nearly all of the issues concerning individual decisions by companies (firms) and consumers (the public). We’ve discussed supply and demand. We’ve addressed marginal revenue and marginal cost. We've discussed numerous other concepts of the free market, including substitutes, complements, consumer surplus, price controls (ceilings and floors), the Law of Demand, normal goods, inferior goods, elasticity, cost measures, utility and indifference curves.
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| − | Keynesian economics is a theory that began with a British economist named John Maynard Keynes (1883-1946). He became a favorite of liberals and his theories of economics were one reason England declined from being the greatest power in the world in the 19th century to a weak nation that could not fully defend itself against Germany in World War II (1940-1945).
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| − | His theory was the opposite of free-market or classical economics. Keynes insisted that government interference with the market was desirable and necessary. Keynes claimed that government spending was needed to reduce unemployment and stimulate economic growth. Under Keynesian economics, "bigger is better" with respect to government. Keynes argued that big deficits (excess of government spending over revenue) were actually a good thing to bring an economy out of a recession.
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| − | This course focuses on Microeconomics, while Keynesian economics is a topic in Macroeconomics, which is the study of national economies rather than individual firms and consumer decisions. So there will not be any questions on a CLEP Microeconomics exam about Keynesian economics. But you will see this term used in debates about the federal budget and overall economy, and its basic meaning is this: increase government spending to stimulate the economy and reduce unemployment. This did not work well for England in the 20th century, as it went from being one of the very strongest economies to a distant second behind other world powers. Does it work any better for the United States today? The "stimulus bill" passed earlier this year is based on Keynesian economics, and provides a test for its validity.
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| | == Banking and the Federal Reserve System == | | == Banking and the Federal Reserve System == |
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| − | On the same Colbert Report, Stephen Colbert discussed the "Federal Reserve Bank" and interviewed Senator Bernie Sanders, who calls himself a Democratic Socialist (which generated a humorous question about whether "Democratic Socialist" is an oxymoron). Senator Sanders called for the resignation or removal of Bernard Bernanke as Chairman of the Federal Reserve. What, you might ask, is the Federal Reserve?
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| | Created in 1913, the Federal Reserve system is a network of 12 banks (one for each Federal Reserve district around the country) that serve as a "bank for banks." In each district, hundreds of banks (and thousands of bank branches or offices) belong to the local Federal Reserve Bank and rely on it for loans and deposits. The vast majority of all bank deposits in the United States are with banks that belong to the Federal Reserve system. | | Created in 1913, the Federal Reserve system is a network of 12 banks (one for each Federal Reserve district around the country) that serve as a "bank for banks." In each district, hundreds of banks (and thousands of bank branches or offices) belong to the local Federal Reserve Bank and rely on it for loans and deposits. The vast majority of all bank deposits in the United States are with banks that belong to the Federal Reserve system. |
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| | The second policy tool -- and the one that attracts the most attention -- is when the Fed changes the interest rate it charges (its "discount rate") to banks. The higher that rate, the higher the interest becomes for many other types of borrowing, from mortgages to deposit rates. Increasing interest rates also reduces the supply of money, making it harder to obtain mortgages and business loans. | | The second policy tool -- and the one that attracts the most attention -- is when the Fed changes the interest rate it charges (its "discount rate") to banks. The higher that rate, the higher the interest becomes for many other types of borrowing, from mortgages to deposit rates. Increasing interest rates also reduces the supply of money, making it harder to obtain mortgages and business loans. |
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| − | Finally, the third way that the Fed affects the economy is in its market operations: it buys and sells U.S. government securities, the instruments the government uses to finance itself. Buying these securities is the same as loaning the federal government itself money. Keep in mind that the Federal Reserve is not the government itself, but operates as an independent agency set up by the government. On its website, as Stephen Colbert humorously observed on his show, the Fed states that it "is not owned by anyone"! | + | Finally, the third way that the Fed affects the economy is in its market operations: it buys and sells U.S. government securities, the instruments the government uses to finance itself. Buying these securities is the same as loaning the federal government itself money. Keep in mind that the Federal Reserve is not the government itself, but operates as an independent agency set up by the government. On its website, the Fed states that it "is not owned by anyone"! |
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| − | So why are politicians calling for Bernard Bernanke to resign as Chairman of the Federal Reserve? Operating with virtually no oversight or accountability, Chairman Bernanke does not seem to have helped the economy much. National unemployment is 10% (as of December 2009) and many businesses are failing. In addition, American taxpayers were socked with nearly a trillion dollar bailout package to save many banks from collapse, which is what the Fed was supposed to be making sure did not happen.
| + | ===Keynesian Economics=== |
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| | + | Keynesian economics is a theory that began with a British economist named John Maynard Keynes (1883-1946). He became a favorite of liberals and his theories of economics were one reason England declined from being the greatest power in the world in the 19th century to a weak nation that could not fully defend itself against Germany in World War II (1940-1945). |
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| | + | His theory was the opposite of free-market or classical economics. Keynes insisted that government interference with the market was desirable and necessary. Keynes claimed that government spending was needed to reduce unemployment and stimulate economic growth. Under Keynesian economics, "bigger is better" with respect to government. Keynes argued that big deficits (excess of government spending over revenue) were actually a good thing to bring an economy out of a recession. |
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| − | Undeterred, however, students from Rutgers University just won second place in the annual College Fed Challenge, which requires acting like the Fed in analyzing about 40 economic indicators like unemployment, inflation, and gross national product (GNP), which is the total market value of all goods and services produced by a nation's economic during the year.
| + | This course focuses on Microeconomics, while Keynesian economics is a topic in Macroeconomics, which is the study of national economies rather than individual firms and consumer decisions. So there will not be any questions on a CLEP Microeconomics exam about Keynesian economics. But you will see this term used in debates about the federal budget and overall economy, and its basic meaning is this: increase government spending to stimulate the economy and reduce unemployment. This did not work well for England in the 20th century, as it went from being one of the very strongest economies to a distant second behind other world powers. |
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| | == Review: Short and Long Run == | | == Review: Short and Long Run == |