Answer both of the following two questions:
In the “State of Long-Term Expectations,” Keynes argued that “as the organization of investment market improves,” there was a growing risk for “the capital development of a country” to become “the by-product of the activities of a casino” (pp.158-159). Based on your reading of section 3 and 5 of the chapter, discuss why Keynes believed the development of financial markets could make the capitalist investment more unstable.
Based on your reading of Hunt, Chapter 15, explain what would happen to the economy if there is a large and sudden decline of investment (use verbal explanations, no graphs or equations are needed).
According to the neoclassical theory of distribution, factors of production (labor and capital) are rewarded by their respective marginal productivity. During the Great Depression, real wage did not increase. Why was this observation (that real wage did not increase during the Depression) in contradiction with the neoclassical (and Keynes’s) theory of employment?
For the neoclassical theory of capital to be valid, the amount of capital has to be quantified independent of prices (that is, using variables other than prices). Explain why aggregation of capital from different capital goods using their prices would result in self-contradiction for neoclassical economics (use verbal explanations, no graphs or equations are needed).
(Everything under number 1 is one question and everything under number 2 is another question. All parts under both questions need to be answered)
