Directions: Read the following passage carefully and answer the questions given below it. Certain words are given in bold to help you locate them while answering some of the questions.

Have you heard that the economy is like a car? It’s the most popular analogy in financial reporting and political discourse. The American people are repeatedly told by financial pundits and politicians that consumption is an ‘engine’ that ‘drives’ economic growth because it makes up 70% of GDP. One notable Nobel-winning economics pundit with a penchant for bizarre growth theories even recently noted that an economy can be ‘based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs.’ Conversely, other economists including Nobel-winner Joseph Stiglitz claim that our economy is stuck in ‘first gear’ due to inequality: too much income is concentrated among too few rich people who tend to save larger share of their income and thus have a lower ‘marginal propensity to consume’. The Keynesian message is clear: if you want to put the economic pedal to the metal, get out there and consume!

Not so fast, Speed Racer. The systematic failure by Keynesian economists and pundits to distinguish between consuming and producing value is the single most damaging fallacy in popular economic thinking. If the economy were a car, consumer preferences would surely be the steering wheel, but real savings and investment would be the engine that drives it forward.
Economic growth (booms) and declines (bust) have always been led by changes in business and durable goods investment, while final consumer goods spending has been relatively stable through the business cycle. Booms and busts in financial markets, heavy industry and housing have always been leading indicators of recession and recovery.
As John Stuart Mill put it two centuries ago, ‘the demand for commodities is not the demand for labor.’ Consumer demand does not necessarily translate into increased employment. That’s because ‘consumers’ don’t employ people. Businesses do. Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh.
those decision very carefully. As economic historian Robert Higgs’ pioneering work on the Great Depression suggests, increased uncertainty can depress job growth even in the face of booming consumption. As recent years have demonstrated, consumer demand that appears to be driven by temporary or unsustainable policies is unlikely to induce businesses to hire.
As John Stuart Mill put it two centuries ago, ‘the demand for commodities is not the demand for labor.’ Consumer demand does not necessarily translate into increased employment. That’s because ‘consumers’ don’t employ people. Businesses do. Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh those decision very carefully. As economic historian Robert Higgs’ pioneering work on the Great Depression suggests, increased uncertainty can depress job growth even in the face of booming consumption. As recent years have demonstrated, consumer demand that appears to be driven by temporary or unsustainable policies is unlikely to induce businesses to hire.
As John Stuart Mill put it two centuries ago, ‘the demand for commodities is not the demand for labor.’ Consumer demand does not necessarily translate into increased employment. That’s because ‘consumers’ don’t employ people. Businesses do. Since new hires are a risky and costly investment with unknown future returns, employers must rely on their expectations about the future and weigh those decision very carefully. As economic historian Robert Higgs’ pioneering work on the Great Depression suggests, increased uncertainty can depress job growth even in the face of booming consumption. As recent years have demonstrated, consumer demand that appears to be driven by temporary or unsustainable policies is unlikely to induce businesses to hire.

Q:

Which of the following statements is/are correct in context with the passage?

• 1
  Economists fail to distinguish between consuming and producing value and form a mistaken belief.
• 2
  Economic growth and declines have always been led by changes in business and durable goods investment.
• 3
  Income distribution is evenly distributed among the rich and is compatible with the tendency to consume.
• 4
  Only (a)
• 5
  Both (a) and (b)