INTRODUCTION: Just to make sure you are on the right track, here's an idea what what you should have discovered in doing each test!

Questions

Do a Harvey Test (see web page for description and data) to see if rising total GDP does, as Keynes suggests, lower unemployment (and vice versa). Know result for exam.

The point of this question is to test Keynes’ idea that the real cause of shifts in employment is shifts in the labor demand curve. It is assumed here that when GDP goes up, the labor demand curve would shift right, and when GDP goes down, labor demand would shift left.

You should find that it tests well.

Do a Harvey Test to see if falling wages really cause unemployment to decline, and vice versa (as the Orthodox school argues). Know result for exam.

This is the Orthodox version of the previous question. It is designed to see if the Orthodox view (that the real cause of changes in unemployment is fluctuations in wages) is supported by the data. Recall that when there is involuntary unemployment, Orthodox economists expect wages to fall and unemployment to decline with them. Hence, they expect wages and unemployment to move in the same direction (both fall at the same time and both rise at the same time).

You should find that this view is not supported.

Do a Harvey Test to see if GDP is determined by investment (assume a positive relationship). Know result for exam.

I keep mentioning in class that although on our diagram Y is affected by consumer spending, government spending (when we include it), exports (when we include it), and investment, it is really the last that tends to drive the business cycle (where "business cycle" means changes in GDP or Y). That’s a pretty strong statement given the number of potential determinants of Y. Can it really be primarily investment that moves it???

Frankly, yes!

Do a Harvey Test to see if rising interest rates discourages investment, and vice versa. Know result for exam.

We said that one of the determinants of investment was the interest rate (the other being the expected rate of profit from investment). Keynes was of the opinion, however, that interest was a relatively minor factor as compared to the expected profits. This question asks you to take a look at the relationship between interest rates and investment to see if they really move in opposite directions.

Hmph. Not really. It appears that interest rates are at best a minor factor in the real world (as Keynes suspected). Ideally, we’d now test the relationship between investment and expected rates of profit from investment. However, data for the latter do not exist!

Do a Harvey Test to see if inflation rises when GDP goes up, and vice versa (the Orthodox view). Know result for exam.

Orthodox economists lean toward the idea that most inflation is of the demand-pull variety. If so, then we should observer rising inflation when GDP rises (and vice versa). Do we?

Nope.

Do a Harvey Test to see if inflation rises when energy prices increase, and vice versa (the Institutionalist view). Know result for exam.

On the other hand, Institutionalists believe that most inflation is cost push. Over the past three decades, the most important cost-push factor has been energy prices. This was especially true when the OPEC countries used their market power over the 1970's and early 1980's (the strength of their cartel took a really big hit about then due to the Iran-Iraq war, hence the massive decline in energy prices). Any evidence that energy costs tend to drive inflation?

Oh yes!