Economic Theory

Write an extended essay, with clearly described, diagramed, or otherwise specified models, to discuss how each of the schools of thought we studied this semester would deal with the following phenomenon:
The economy has experienced a sudden collapse of asset prices, with the stock, real estate, and commodity market experiencing declines of over 50 percent relative to last year. Data show a loss of nearly 1 million jobs since last month, which brings to year-to-date loss of jobs to nearly 5 million. And, bank lending has slowed sharply, and initial data on investment suggests a sharp decline in new projects. The central bank reports that that bank balance sheets have deteriorated significantly, and it is contemplating emergency monetary actions. The country’s Prime Minister claims to be “on top of the situation,” but polls suggest her popularity is falling fast as confidence in the government’s economic leadership diminishes. This appears to be the start of a serious recession, with the rate of decline in production rivaling the rapid declines in 2008 and 2009.
After describing each school’s likely policy prescriptions, you might conclude with a brief assessment of which approach you think will be most successful and why.
(Note: This will necessarily be an extended essay, probably running ten pages or more once the models are thoroughly described and diagramed. Also, do not be reluctant to take a position on the models; there is not necessarily a right or wrong answer to the final question above, but whatever you conclude must be justified and explained.)
Sources labeled with “2” on the documents is the sources he provided us with accomplishing this assignment. If labeled “1” these are other sources used for other papers we have written in class.


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