Essay on How did economists get it so wrong - 2029 Words

Shortly after the financial crisis in 2008, many economists had to rethink their approach to the market. Everyone knew we had a panic because the stock market and the housing market collapsed. American economy was reaching to the bottom. Many people considered it as a second worst recession after the great the Great Depression. But what was the cause? Who were responsible for the crisis? What can we learn from this turmoil? In the recent New York Times Sunday magazine article, Nobel Prize winner Paul Krugman offered his explanation for the causes and insight toward fixing the economy. In the article, Krugman addresses several problems underlying the recent state of the economy. He traces the cause for our recession all the way back to†¦show more content†¦Freshwater economists rely on the models that they have used for a long time to predict the markets’ performance. They want the markets to operate on their own. They think that government intervention will make it wo rse. Consider an economy in the long run and the effects of fiscal policy. When the government alters its spending, they will directly affect the economy’s performance. Freshwater economists usually don’t buy into the notion of government purchases. When the government increases their purchase by a certain amount, it will increase the demand for goods and services. According to the equation of supply and demand for the economy’s output, disposable income and consumption are unchanged. Total output is constrained by the factors of production. An increase in government spending must be balanced out by other variable. In this scenario, it is investment. It must decrease with an equal amount. Investment decreases because interest rate rises (Mankiw, pg. 69). Most economists would agree that government purchases would lead to a reduction in national saving and hence raising the interest rate. What about government intervention on a large scale of open economy in the long run? Again, Freshwater economists still don’t think fiscal policy is a plausible choice. When the government practices expansionary fiscal policy, whether it is an increase in purchases or a decrease in taxes, a chain of unavoidable consequences follows. First, the enactment wouldShow MoreRelatedEconomic Theory1225 Words   |  5 Pagespaper was prepared for ECN 150, Introduction to Microeconomics, Module 2 Homework Assignment taught by Nikki Follis. Part I After reading the two articles in Modules 1 and 2 related to Economic Theory (first,â€Å"How Did Economists Get It So Wrong† and second, â€Å"History of Economics Playground†), reconstruct what happened from 2006 through 2012 as it relates to microeconomic theory. Was there too much focus on the macro climate and not enough on the micro climate? Do you concurRead MoreKeynes Macroeconomic Theory Essay1181 Words   |  5 PagesHow did Keyness idea of the reasons for the macro-economic instability challenge the prevailing economic orthodoxy? 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