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Review Questions (Final Exam)
1. Why did the Great Stagflation present a huge problem to the Keynesian Theory? Why
could this theory not explain the phenomenon of stagflation?
2. Summarize Friedmans critique of managing aggregate demand to maintain full
3. How did Friedmans theory provide an explanation for the phenomenon of stagflation?
4. State the key proposition of Says Law. What insight does it contain regarding the nature
of human cooperation under a system of division of labor?
5. Using the insight provided by Says Law, explain the consequences of a significant
distortion of the structure of production relative to consumer preferences. How does
the initial crisis or cluster of errors snowball into a recession?
6. Explain the concept of the order of goods as used by the Austrian Economists. How
does this relate to the concept of stages of production?
7. Draw, label and explain the Hayekian Triangle. How does this diagram provide a concise
depiction of the process of production in a market economy?
8. Explain the process of inter-temporal coordination that takes place in response to an
increase of savings on the free market. In doing so, utilize the Hayekian Triangle, the
loanable funds market and the PPF.
9. What are the consequences of an artificial lowering of the interest rate by the central
bank in the Austrian framework? How does this lead to inter-temporal dis-coordination?
In doing so, utilize the Hayekian Triangle, the loanable funds market and the PPF.
10. When the cluster of entrepreneurial errors that result from an artificial lowering of the
interest rate are revealed, what, according to the Austrian School, is the best policy
response to minimize the length of the recession that will follow?
11. How does this policy response differ from those advanced by the Keynesians? What are
the theoretical differences that drive these differing policy recommendations?
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