Contemporary Issues in Global Finance (length should be about 8-9 pages double spaced pages)
I. Read the following statement and answer the following question on the Great Depression and the 2007-2009 recession using economic theory and yours reading.
Nobel Prize winning economist Paul Krugman in his column in the New York Times on November 7, 2010, entitled “Doing It Again” wrote: “Eight years ago, Ben Bernanke, already a governor at the Federal Reserve although not yet chairman, spoke at a conference honoring Milton Friedman. He closed his talk by addressing Friedman’s famous claim that the Fed was responsible for the Great Depression, because it failed to do what was necessary to save the economy. “
“You’re right,” said Mr. Bernanke, “we did it. We’re very sorry. But thanks to you, we won’t do it again.” Famous last words. For we are, in fact, doing it again.
Q: Did we in fact “do it again” as Krugman claimed? More specifically:
1. (1) Was the Fed’s policy stance the same in the recent recession as it was in the Great Depression?
2. (2) Was the outcome – the magnitude and duration of the recessions – the same in the two episodes?
3. (3) If so, why? If not, why not?
II. Consider this quote from Adam Smith
“The man of system…is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” The Theory of Moral Sentiments, Part VI Section II, Chapter II, pp. 233-4, para 17.
Q: (1) Discuss Smith’s statement and compare it to the views espoused by Friedrich Hayek on economic organization.
(2) Are Smith and Hayek of similar mindsets?
III. Consider the following statement: Because there is a stable tradeoff between inflation and unemployment, the Federal Reserve can reliably decrease unemployment by simply producing a higher rate of inflation through its monetary policies?
Q :(1) Is this statement true? Explain your answer based on your understandings of both theory and empirical evidence.
(2) Suppose the Federal Reserve, continually tries to push unemployment lower. What are the possible consequences?
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