1-Evaluate this statement: “Because of a recession, Tesla has taken severe financial losses and is having difficulty obtaining credit. If we allow Tesla to go out of business, it will not just impact the auto industry; thousands of other businesses will suffer as a result of their collapse. Tesla is just too big for us to allow them to fail, therefore the government must loan Tesla money to keep them from going out of business.”
Some businesses are too big to fail, as their impact on the economy is immense and of various natures. In case of Tesla, the cost of failure of Tesla, for the economy, is immense as not only it produces employment at large scale, but also there are several other businesses, which are associated with Tesla. Also, Tesla relies on innovation to attain competitive edge; therefore, which positively influences the evolution of the industry. Therefore, the government/Federal Reserve must produce opportunities, such as a soft loan, for companies like Tesla to survive the recession.
2-Evaluate the following statement: “If we increase the money supply, we can lower unemployment.”
Liberal economic models primarily depend upon policies (monetary) of Central Bank to realize various kinds of political-economic objectives. One of the prime objectives of any government/economy is a high employment rate. This objective is achieved by increasing the size of private investment (in an economy, which has an inverse relationship with interest rates. When Central Bank expands the money supply (expansionary monetary policy, it lowers interest rates, which increases the size of investment in an economy. As the size of investment increases, so does employment. However, during the depression, extraordinary measures (such as expansionary Fiscal Policy) are required.
3- Evaluate this statement: “Inflation decreases the value of money, therefore inflation is bad and should be avoided if possible.”
It is true that inflation reduces purchasing power; however, it is also a fact that inflation provokes investment as it is viewed as an incentive by investors. Also, inflation at a certain rate (around 3-3.5%) is essential for healthy economic growth. Therefore, only abnormal inflation should be avoided.
4-Why are prices important? How does this relate to government price controls and government manipulation of interest rates?
In a free-market economy, it is demand and supply, which determine price and output. Prices of commodities affect not only consumer/producer surplus and size of aggregate consumption, but also consumer behavior and size of the investment. Therefore, when governments try to regulate prices, it complicates economic affairs. However, as capitalism is inherently flawed; therefore, the government has to interfere.
5-What are some of the fundamental differences in the way a Classical economist would view business cycles in comparison to a Keynesian? How would these differences affect policy suggestions related to business cycles?
Classical economists view the business cycle as an organic economic event, whereas a Keynesian economist views it as a consequence of inherent contradictions in a free-market economy (capitalism), which necessitates government interference. A classical economist would suggest expansionary monetary policy, whereas Keynesian economist would suggest expansionary fiscal policy.
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