A. What is Say’s Law? How may it fail to hold in a monetary economy? B. Explain

Question

A. What is Say’s Law? How may it fail to hold in a monetary economy? B. Explain how deficit spending may increase national output in a setting of flagging private investment. How does the propensity of consumers to spend their income shape this effect? C. What are the three types of financial structure identified by Hyman Minsky? Which of these types would best explain the situation faced by somebody taking out an interest-only mortgage? D. What are the limitations and possible analytical problems with the theory of comparative advantage? E. “In order to industrialize and ‘catch up’ economically, developing countries should adhere to the same ‘free-trade’ principles upheld by Britain as it industrialized in the course of the nineteenth century.” Discuss.

Explanation / Answer

These are all very different questions, answering the first two for you.

A. Say’s law states that the production of goods creates its own demand. This view suggests that the key to economic growth is not increasing demand, but increasing production. For example: If a producer produces a product, then he will sell it quickly. This production creates wages for workers and income for the producer. Therefore, the production has increased wealth and leads to demand for other goods.

But  it fail to hold in a monetary economy. In reality production does not equal demand. In a recession, there can be insufficient aggregate demand for goods produced. Also, prices and wages are not flexible. In certain circumstances, people may not have the confidence to spend and invest. They may become risk averse and hoard cash in unproductive savings. It may be very rational to ‘hoard’ money – especially in a period of deflation or anxiety.

B. Deficit Spending government has a powerful impact on the lives of citizens. If government spending is zero, presumably there will be very little economic growth because enforcing contracts, protecting property, and developing an infrastructure would be very difficult if there were no government at all.Government spending requires costly financing choices. The federal government cannot spend money without first taking that money from someone. All of the options used to finance government spending have adverse consequences. Taxes discourage productive behavior, particularly in the current U.S. tax system, which imposes high tax rates on work, saving, investment, and other forms of productive behavior. Borrowing consumes capital that otherwise would be available for private investment and, in extreme cases, may lead to higher interest rates. Inflation debases a nation's currency, causing widespread economic distortion.

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