The exam essay below is the last question on the final exam. You should plan about 30 minutes to write your essay. You should not do any special research for this question or talk to anyone not enrolled in the class (such as the peer adviser or CLL graders), and you will not be allowed to take any notes into the exam. However, you are encouraged to plan your answer in advance, consulting course readings, problems sets, handouts, etc., and, if you wish, discussing the question with your classmates.

Essay question:
Eastern Europe and the former Soviet Union are in the midst of a transformation from centrally planned economies to market economies. Policy makers in each of these countries must decide the extent to which their economic system should be left to the free play of the market forces of supply and demand, and the extent, if any, to which government should intervene in the economy. Your essay concerns this decision. To prepare for this essay, first read and carefully consider the following advice to those who are designing the new market system for those countries:

    "Free markets, left alone, result in those goods being produced that maximize combined (consumer and producer) surplus, and ensure a fair distribution of income. As a result, government intervention in the microeconomic marketplace cannot make society better off. As far as the role of the government in the macroeconomy, it should be confined to the view that the macroeconomy would be more stable and efficient if macroeconomic policy makers did not try to adjust monetary and fiscal policies in response to changing economic conditions."

To write your essay:
    1. First decide if you agree or disagree with the advice in the quotation (or decide which part(s) of the advice you agree with and which part(s) you disagree with).
    2. Write an introductory paragraph in which you indicate your agreement or disagreement and in which you present the thesis of your essay.
    3. In the body of your essay:
    a. If you agree with the quote, carefully explain why (that is, support your thesis). Be sure to include counterarguments for the main criticisms you would expect to encounter from someone who disagrees.
    b. If you disagree with the quote, carefully explain when you would not recommend government intervention in the market and why, and when you would recommend government intervention and why.
    4. In either case, include appropriate diagrams to help you explain and support your propositions and arguments. You may also want to divide your paper into micro and macro sections.

Please note that we have not studied the economies of Eastern Europe and the former Soviet Union, so you are not expected to have any knowledge of them nor make any reference to them in answering this question.