Answer to Question #249932 in Macroeconomics for Mehwash Sk

Question

Why is macro policy more difficult than the simple model suggests?

2.      Austrian economist Murray Rothbard has argued that government intervention during 1929 made what could have been a 1-year recession set off by the stock market crash into a 12-year depression. He believed that by creating confusing signals, government intervention kept investors from gaining knowledge of what investments to avoid. a. Is Rothbard’s explanation of the Depression consistent with the AS/AD model? b. If one agrees with Rothbard, how would one’s proposed policies to deal with recessions differ from those presented in the book? (Austrian)

Answer 1

Solution:

a.). Yes, Rothbard’s explanation of the Depression is consistent with the AS/AD model.

He argued that failures of government policies resulted in furthering the Great Depression since consumption and investment levels decreased at a high rate. As a result, the aggregate demand decreased, including a decrease in the real GDP. At the same time, the price levels decreased resulting in a fall in the aggregate supply.

 

b.). According to Rothbard, the government can tackle Depression by not interfering in the adjustment process but rather assist positively by lowering its relative role in the economy, which is slashing its own expenditures and taxes.

The policies that one can propose to tackle Depression are increasing consumption and investment by reducing income tax rates and corporation tax rates and increasing government spending in the economy. These policies are very different from those presented in the Austrian book.