Question

Boyd and Dianne Call earn \(\$ 100,000\) a year. They went deeply into debt after paying \(\$ 75,000\) for their daughter Chelsea's wedding and \(\$ 50,000\) for their daughter Kaylynne's sweet sixteen party. Their behavior might best be described by (LO6, 7,8) a) Milton Friedman b) John Maynard Keynes c) Bruce Steinberg d) Thorstein Veblen

Short answer

The behavior of Boyd and Dianne Call, who went deeply into debt after spending a significant amount on their daughters' events, can be best described by the concept of conspicuous consumption, coined by Thorstein Veblen. Conspicuous consumption refers to the practice of spending money on luxury goods and services to display wealth and social status. Hence, the correct answer is d) Thorstein Veblen.

Step-by-step solution

Identify Milton Friedman's concepts

Milton Friedman was known for his focus on monetary policies, limited government intervention, and free-market capitalism. His theories do not directly explain the behavior of the Call family.

Identify John Maynard Keynes's concepts

John Maynard Keynes was an advocate of government intervention in the economy, especially during recessions. He proposed that government should increase spending and cut taxes to boost demand during an economic downturn. Keynes's ideas do not directly address the behavior of the Call family.

Identify Bruce Steinberg's concepts

Bruce Steinberg is an economist known for his work in macroeconomics and financial markets, but his ideas do not apply to the spending behavior of individuals.

Identify Thorstein Veblen's concepts

Thorstein Veblen's ideas can be connected to the behavior of the Call family. Veblen coined the term "conspicuous consumption," which refers to the practice of spending money on luxury goods and services to display wealth and social status. Boyd and Dianne Call's spending on their daughters' events might be examples of conspicuous consumption as they spent a large sum of money on luxury events.

Determine the best fitting economist

From the analysis above, the behavior of Boyd and Dianne Call best fits with the ideas of Thorstein Veblen, specifically the concept of conspicuous consumption. This suggests that their spending on their daughters' events might be more about displaying wealth and social status than the actual cost of the events. Therefore, the correct answer is: d) Thorstein Veblen

Key concepts

Thorstein Veblen

Thorstein Veblen was a sociologist and economist renowned for his critique of capitalism and the wealthy class's behavior within society. One of his most famous contributions is the concept of conspicuous consumption, defined by the extravagant spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the context of the Call family, their high expenditures on social events can be interpreted through the lens of Veblen's theories.

Veblen argued that conspicuous consumption served as a visible marker of social status and economic power. Activities such as elaborate weddings and birthday celebrations often serve as stages where this display of wealth is performed. Veblen's insights suggest that in a consumption-driven society, individuals might incur debt not just for the utility of a purchased item or service, but for the social prestige that comes with it.

In teaching students about Veblen, a focus on real-world applications and current societal behaviors helps in contextualizing his theories. Highlight examples from popular culture, such as celebrity lifestyle and social media influencers, to illustrate the modern-day manifestations of conspicuous consumption.

Keynesian Economics

Keynesian Economics is named after the British economist John Maynard Keynes. His ideas formed the basis of macroeconomic thought during the mid-20th century, particularly his advocacy for government intervention as a means to mitigate the boom and bust cycles of capitalism.

Keynes argued that during economic downturns, consumer demand tends to drop, leading to decreased production and, consequently, a rise in unemployment. To counteract this, he suggested that governments should increase spending and lower taxes to stimulate demand and pull the economy out of recession. This is known as fiscal policy.

While the spending habits of the Call family are not directly linked to Keynesian economic principles, Keynes's overarching ideas about consumption and economic health reinforce the importance of understanding consumer behavior within the broader economy. For students, distinguish between personal consumption habits and broader economic policies designed to affect national consumption levels.

Monetary Policy

Monetary policy refers to the actions undertaken by a central bank, such as the Federal Reserve in the United States, to control the money supply and interest rates in the pursuit of economic objectives. These objectives typically include managing inflation, maximizing employment, and stabilizing the financial system.

For students studying the behavior of individuals like the Call family, exploring monetary policy may seem distant from personal spending. However, understanding the broader context in which private financial decisions are made can be vital. For instance, when interest rates are low, households are more able to borrow money cheaply, which can lead to greater spending on credit – much like the Call family did. Conversely, when rates are high, borrowing becomes more expensive, and this could potentially curb excessive spending.

It's important to explain to students the direct and indirect effects of monetary policy on personal finances. A central bank's decision can ripple through the economy, affecting everything from mortgage rates to the returns on savings accounts, ultimately influencing how individuals manage their money.