Essay on How did economists get it so wrong?

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Shortly after the financial crisis in 2008, many economists had to rethink their approach to the market. Everyone knew we had a panic because the stock market and the housing market collapsed. American economy was reaching to the bottom. Many people considered it as a second worst recession after the great the Great Depression. But what was the cause? Who were responsible for the crisis? What can we learn from this turmoil? In the recent New York Times Sunday magazine article, Nobel Prize winner Paul Krugman offered his explanation for the causes and insight toward fixing the economy. In the article, Krugman addresses several problems underlying the recent state of the economy. He traces the cause for our recession all the way back to…show more content…
Freshwater economists rely on the models that they have used for a long time to predict the markets’ performance. They want the markets to operate on their own. They think that government intervention will make it worse. Consider an economy in the long run and the effects of fiscal policy. When the government alters its spending, they will directly affect the economy’s performance. Freshwater economists usually don’t buy into the notion of government purchases. When the government increases their purchase by a certain amount, it will increase the demand for goods and services. According to the equation of supply and demand for the economy’s output, disposable income and consumption are unchanged. Total output is constrained by the factors of production. An increase in government spending must be balanced out by other variable. In this scenario, it is investment. It must decrease with an equal amount. Investment decreases because interest rate rises (Mankiw, pg. 69). Most economists would agree that government purchases would lead to a reduction in national saving and hence raising the interest rate. What about government intervention on a large scale of open economy in the long run? Again, Freshwater economists still don’t think fiscal policy is a plausible choice. When the government practices expansionary fiscal policy, whether it is an increase in purchases or a decrease in taxes, a chain of unavoidable consequences follows. First, the enactment would
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