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In 1776 Adam Smith one of our Founding Forefathers wrote a seminal economic text, An Inquiry into the Nature and Causes of the Wealth of Nations. Explain what Smith meant by the 'invisible hand'. What can you see that might be a problem with this theory today, given the nature of the complex US economy?

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Anne Gillian Duero
Anne Gillian DueroLv10
28 Sep 2019

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Related questions

Considered by many to be the founder of modern economics, Adam Smith published his masterpiece The Wealth of Nations in 1776. Smith wrote in support of market economies as feudalism in Europe was unravelling. Hence, many of his insights clashed with the ideas of his contemporaries whom continued to be drawn to less modern notions of markets as governed by duties owed, hierarchy, master and servant, and paternalism. In Smith’s view, markets are guided by the self-interests of market participants, not by obligations imposed, moral or otherwise, by religious authorities, aristocracy, and crown.

Consider the following quote taken from The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens….Every individual…neither intends to promote the public interest, nor knows how much he is promoting it….He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part in it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Now suppose that Jim enters the market to purchase a gallon of milk from a local dairy. Jill enters the market to contribute $100 to a charitable cause. Based on Smith’s analysis, which transaction is guided solely by self-interest? How could either transaction contribute to the public interest? Is one superior to the other in that the first transaction confers mutual economic gains to both parties while the other confers a gain to only a single party? Are two gains superior to one? Briefly discuss.

Rules: Limit your thoughts to no more than two pages total, using Microsoft Word, 12 point type in Times New Roman font. Double spaced with one inch margins throughout. Do not worry about being right or wrong, the purpose of this exercise is for you to stretch your mind and to think critically

Begin by discussing the Profit Maximization model and its corresponding formula Ï= pq - cq. Think of a product you might buy in bulk from a store like Costco. Think about how much the price is per unit and what you think the cost per unit might be. How many units come in a bulk container of your product? What would the profit be, based on your assumptions about the costs and price of the product?

Next, market prices are set based on the supply and demand of a good or service, rather than by some external decision-making entity. This is because people are seeking to maximize their utility and businesses seek to maximize their profit, and the goal of a functioning market is to find that point where utility gets as high as it can without dipping into the profit margin. This interplay of people's desires and the amount available create what was called by Scottish Enlightenment philosopher Adam Smith as the "invisible hand" of God in his book The Wealth of Nations. Hopefully, the end result will be equilibrium as indicated in the Marshallian Supply-Demand Cross. Government, meanwhile, seeks to maximize the public welfare, and steps in when there are certain economic outcomes desired but not being met - in what we refer to as socialism (note: every capitalistic country engages in some degree of socialism - it is the extent to which that occurs that decides whether we call the country capitalist or socialist). What happens to the invisible hand when the government steps in?

3. Please list the 4 key supply side growth factors we discussed, and discuss their viability in terms of getting our economy growing again, given that today our economy is not growing.

a. The slides should provide you with what you need here.

b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will likely cause us problems? What approaches could we use to increase our odds of success? You need to think carefully on this one.

4. Creative problem solving

Scenario #1:

The rate of growth in the US economy is currently 0.5% annually. Your mission is to increase our growth rate to at least 4% annually, without setting off unacceptable levels of inflation. You have the tools of fiscal and monetary policy available.

a. Present your solution to the problem – write it down first.

i. Strategy for creating your solution:

1. First identify a specific natural resource and think through how having more of it or a better quality of it could lead to significantly increasing the GDP growth rate.

2. This will lead you to a general solution to the problem.

3. Write it down! The explanation of the solution should take at least one good paragraph!

4. Determine what will be required to make the solution happen, typically it is money.

5. Think of ways to use your fiscal and monetary policy tools to get the needed money.

6. To attack the problem you must select at least one Monetary Policy tool and one Fiscal Policy tool.

b. Write down the names of the one fiscal policy tool and the one monetary policy tools you picked.

i. Remember – for this question you need one Fiscal Policy tool and one Monetary Policy tool.

c. Explain why you picked the tools that you picked and why you did not select the other choices.

i. Specifically explain what is good about the tool you selected and what is not so good about the tools

you did not select? Do this for

both the monetary and fiscal policy tool that you selected. The key here is to use some decision criteria in making your choice.

d.,Thoroughly and completely explain how your solution would work to solve the problem. You must include and explain the use of your monetary and fiscal policy tools and indicate the impact your solution would have on the key economic variables. Please present your answer using a chain of events format. Be specific. I need to see the detail.

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