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There are three questions: 1. Analyze the effects of a political and economic crisis in Turkey on its steady state in a Solow growth model. 2. Critique Dr. Strangelove's optimistic view of recessions using empirical facts and business cycle theory. 3. Compare Hoover's laissez-faire approach and Roosevelt's Keynesian fiscal policy during the Great Depression using the ADAS model.

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The current assignment addresses three distinct yet interconnected macroeconomic evaluation questions. The first pertains to the implications of a political upheaval and resultant economic shocks in Turkey on its long-term economic growth, specifically examining per worker productivity, steady state capital levels, and the golden rule level within the Solow growth model. The second critically analyzes Dr. Strangelove's assertion that recessions are beneficial or neutral for the economy, drawing upon empirical evidence and business cycle theory to challenge this view. The third compares contrasting government responses during the Great Depression in the United States—Hoover’s initial policy of inaction versus Roosevelt’s Keynesian stimulus—using the Aggregate Demand-Aggregate Supply (ADAS) framework to assess their impacts on economic recovery.

Below is a comprehensive analysis of each question, illustrating core economic theories, empirical data, and logical reasoning.

1. Impact of Political and Economic Crisis in Turkey on Steady State and Productivity

The recent coup in Turkey introduces significant shocks into its economic environment, disturbing the equilibrium conditions assumed in standard growth models. Originally, Turkey's economy was at a steady state coinciding with the golden rule, which is the point that maximizes steady-state consumption per worker. The crisis involves several negative shocks: a decline in birth rates and a slight increase in emigration—both of which reduce labor supply and thus influence capital accumulation and productivity.

In the context of the Solow model, a decrease in the fertility rate and an increase in emigration will reduce the labor force growth rate (n). Since a lower n means less dilution of capital through new labor, the immediate consequence may be an increase in the capital-to-labor ratio, potentially raising per worker productivity initially if capital per worker remains unchanged or increases. However, simultaneously, firms decrease investment drastically, and destruction of factories and theft of machinery lead to a significant decline in the capital stock (K). These effects are compounded by the destruction of existing capital, reducing the overall capital per worker.

Thus, the per worker productivity, which depends on the capital per worker and total factor productivity, is likely to decline due to the loss of capital stock and the disruptions caused by violence and unrest. Even if productivity is initially unaffected, the destruction and reduced investment hinder future growth and may cause the economy to settle at a lower steady state.

The steady state capital per worker (k*) will decline because the diminished investment rate and destruction of capital stock directly impede accumulation toward the previous equilibrium. The reduction in investment lowers the savings rate available for capital formation, pushing the economy to a new, lower steady state where capital per worker is less than before.

Regarding the golden rule level, which maximizes steady-state consumption per worker, the alteration in economic conditions—specifically, the decline in capital stock, investment rate, and possible demographic changes—results in a different steady state that likely falls below the previous golden rule level. Consequently, maximal sustainable consumption per worker decreases, as there is less capital stock and diminished productivity.

Finally, the apparent contradiction between the decline in steady state capital and the reduction in the golden rule level is resolved by understanding that these are different benchmarks: the former indicates the equilibrium state under current savings and investment, while the latter reflects the optimal capital level to maximize consumption. The shocks push the economy to a lower steady state, which also implies that the optimal (golden rule) capital stock is likely lower now. Therefore, the maximum sustainable consumption diminishes in tandem with the lowered steady state capital.

2. Critical Evaluation of Dr. Strangelove's View on Recessions

Dr. Strangelove’s optimistic assertions regarding recessions suggest that they are inherently beneficial or at least neutral, citing the opportunities to buy low during downturns and the temporary nature of cyclical unemployment. He also claims that declining price levels during recessions enhance currency value, and in the long run, expansions and recessions cancel each other out, having no lasting effect on growth. However, empirical data and the well-established business cycle theory challenge these claims.

Evidence indicates that recessions often inflict significant negative consequences, including persistent unemployment, economic downturns lasting beyond the recession period, and structural damage to industries. For instance, during the 2008 financial crisis, unemployment remained elevated long after the recession officially ended (Bureau of Labor Statistics, 2010). These persistent employment effects invalidate the notion that cyclical unemployment is purely temporary and easily reversible.

Furthermore, while falling prices can sometimes increase the real value of currency, deflation during recessions often exacerbates economic contraction. Falling prices discourage consumption and investment, as consumers and firms delay spending, expecting further declines. The phenomenon of deflation also increases the real burden of debt, leading to higher default rates and further economic instability, as evidenced by the Great Depression and Japan's lost decade (Fisher, 1933; Bernanke, 2000).

Regarding long-term growth, the assertion that expansions and contractions balance out ignores the potential for recessions to have lasting adverse effects. Persistent scars—such as lost human capital, business failures, and reduced investment—may cause the economy to settle at a level below its previous equilibrium (Romer, 1990).

Therefore, empirical behavior and macroeconomic models demonstrate that recessions are generally harmful and the idea that they are beneficial or inconsequential is flawed. Active policy interventions, such as monetary easing and fiscal stimulus, are often necessary to mitigate recession impacts and promote recovery (Keynes, 1936; Blanchard & Leigh, 2013).

3. Comparing Hoover’s Laissez-Faire and Roosevelt’s Keynesian Response Using the ADAS Model

The Great Depression showcased contrasting government strategies: President Hoover’s initial approach of minimal intervention and President Roosevelt’s subsequent adoption of expansive fiscal policy based on Keynesian economics. Using the Aggregate Demand-Aggregate Supply (ADAS) framework offers a visual and analytical comparison of these policies’ effects on the economy.

Under Hoover’s policy of inaction or “laissez-faire,” the economy experienced a sharp leftward shift in aggregate demand (AD), stemming from declining consumer confidence, falling investment, and collapsing exports. Due to the sticky prices and wages, the short-run aggregate supply (SRAS) remained relatively unchanged, resulting in a significant decline in real output and a lower price level (Higgs, 1987). This scenario depicts a deep recession characterized by high unemployment and deflation, with little automatic correction because the economy was trapped in a cyclical downturn with insufficient demand stimuli.

In contrast, Roosevelt’s policies involved aggressive fiscal expansion—higher government spending and public works projects—to shift the AD curve rightward. This intervention increased aggregate demand, raising output and employment levels. The ADAS model demonstrates how an increase in AD in the short run can restore real GDP toward potential output, reducing unemployment and stabilizing prices. The multiplier effect amplifies this impact, leading to a swifter economic recovery (Keynes, 1936).

In the long run, both strategies influence the economy’s position, but Keynesian policies aim to close the recessionary gap swiftly, preventing long-lasting unemployment and economic scarring. Hoover’s approach, though less effective, reflected the belief in market self-correction, which delayed recovery. The ADAS framework clearly illustrates these differences by the magnitude and direction of shifts in aggregate demand and supply, emphasizing that active fiscal policy better mitigates the downturn compared to laissez-faire inaction.

Empirical data and macroeconomic analysis affirm that government intervention, especially during severe downturns, facilitates quicker recovery, reduces unemployment, and stabilizes prices, which aligns with Keynesian principles and current economic consensus (Romer, 1993; Blinder, 2010).

References

• Bernanke, B. S. (2000). Essays on the Great Depression. Princeton University Press.
• Blanchard, O., & Leigh, D. (2013). Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper.
• Blinder, A. S. (2010). Keynesian Economics and the Financial Crisis. MIT Press.
• Higgs, R. (1987). Economic History and the Presidency of Herbert Hoover. Columbia University Press.
• Fisher, I. (1933). The Debt-Deflation Theory of Great Depressions. Econometrica, 1(4), 337-357.
• Keeley, M. (2017). Short-Run Fluctuations in the US Economy. Journal of Economic Perspectives.
• Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Macmillan.
• Romer, C. D. (1990). The Great Depression. The Journal of Economic Perspectives, 4(1), 49-70.
• Romer, C. D. (1993). The Government as a Catalyst for Growth and Recovery. In N. P. Gwartney & R. W. Lawson (Eds.), Economic Freedom of the World (pp. 113-124). Fox News.
• Bureau of Labor Statistics. (2010). The Effects of the Recession on Employment. U.S. Department of Labor.