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Name and describe at least two of the positive features of this era (1945-1973) that gave rise to the term "Golden Age" (e.g., why was this era so special) and consider the role of the US government in facilitating these features.

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

In American popular memory, the period between 1945 and 1963 has come to be considered a "Golden Age," an idealized version of the nation that was destroyed by the discord of the 1960s. Having read about the different aspects of this period, in terms of how the economy worked, what life was like, etc, why has this period been so idealized and, further, do you agree with this "Golden Age" ideal?

Keynesian Multipliers: Suppose the president would like to stimulate the level of output in the economy by introducing a tax cut. However, he also would like to keep a balanced budget if possible. Let's consider if these two objectives can be consistent with each other. Assume a consumption function C = 100 + 0.75(Y-T), and let G = 100, T = 100, I = 100 (investment is not a function here of the interest rate).

a) First, suppose there is just a tax cut alone, lowering T from 100 to 90. Use the Keynesian multipliers to compute the change in output. Compute also the effect on government saving.Will the president be satisfied (did he get a rise in output and a balanced government budget)?

b) Now suppose he combines the tax cut with spending cuts to keep the budget balanced. So supposed taxes and government spending both are cut from 100 to 90. What is the effect on government saving and output? Will the president be satisfied?

c) Now suppose that the president instead uses a rise in government purchases to stimulate the economy, and then raises taxes to pay for these purchases. In particular, suppose government purchases and taxes both are raised from 100 to 130. Compute the effects on output and government saving. Will the president be satisfied now? Explain how this result is possible and why it is so different from the result in part (b) above.

1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

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