04 Jun WHAT IS THE MAIN FACTOR THAT CAUSES RECESSIONS?
What is the main factor that causes recessions?
Question
Answer these two essay question.
1. explain the keynesian arguments regarding the appropriate keynesian government policies during a recession. Your answer should include but not necessarily be limited to answering the following questions.
* What is the main factor that causes recessions? what is the main economic problem during the recessionary phase of the business cycle (i.e; why are recessions bad?)
* Why should the government do anything during a recession?
Use the aggregate demand-aggregate supply model to illustrate how keynesian policies are effective during a recession (your answer should include a diagram of the aggregate demand- aggregate supply mode.) How do these keynsian policies affect real income, unemployment, and the price level?
2. Wright and Quadrini describe the short run and long run effects of injecting liquidity (increasing the money supply) into the economy. explain Wright and Quaridini’s position on short run and long run interest rate changes.
*Specifically, explain how an increase in the money supply could lead to lower interest rates in the short run and higher interest rate in the long run. Include a diagram of you explanation.
*Second, explain how an increase in the money supply could lead to higher interest rates in the short run and higher interest rate in the long run. Include a diagram of you explanation.
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