Disputes Over Macro Theory and Policy

Transcription

1 s or Discretion C H A P T E R Disputes Over Macro Theory and Policy 19-1

2 s or Discretion 19-2 CLASSICAL ECONOMICS AND KEYNES Classical Economics Adam Smith Laissez-faire The Classical Vertical Aggregate Supply Curve Stable Aggregate Demand Real Output Depends Upon Quantity of money possessed by households & businesses Purchasing power of money is determined by the price level

3 Classical Economics AS s or Discretion P Real Domestic Output

4 Classical Economics AS s or Discretion P 1 P 2 AD Real Domestic Output

5 s or Discretion 19-5 CLASSICAL ECONOMICS AND KEYNES Keynesian Economics John Maynard Keynes, 1930s The Prices and Wages Downwardly Inflexible Active Government Policy Required to Stabilize the Economy Horizontal Aggregate Supply Curve to Full-Employment Unstable Aggregate Demand

6 Classical Economics AS s or Discretion P Real Domestic Output

7 Classical Economics AS s or Discretion P Q 2 Real Domestic Output AD 2

8 s or Discretion 19-8 CAUSES OF MACRO INSTABILITY Mainstream Changes in Investment C a + I g + X n + G = GDP Adverse Aggregate Supply Shocks Monetarist Equation of Exchange M V = P Q = GDP Stable Velocity

9 CAUSES OF MACRO INSTABILITY Summary Classical Economics s or Discretion 19-9 Mainstream of Investment is the Main Cause of Output Changes Monetary Policy is a Stabilizing Factor Monetarist With a Stable Velocity, Nominal GDP Depends Upon the Money Supply

10 s or Discretion Real-Business-Cycle Theory AS LR1 P Real Domestic Output

11 s or Discretion Real-Business-Cycle Theory AS LR2 AS LR1 P Q 2 Real Domestic Output

12 s or Discretion Real-Business-Cycle Theory AS LR2 AS LR1 P 1 Q 2 Recession With Stable s AD 2 Real Domestic Output

13 s or Discretion Real-Business-Cycle Theory AS LR2 AS LR1 Coordination P 1 Failures Q 2 Recession With Stable s AD 2 Real Domestic Output

14 DOES THE ECONOMY SELF-CORRECT? Classical Economics s or Discretion New Classical? Rational Expectations Theory Speed of Adjustment Unanticipated Price Changes Surprises Fully Anticipated Price-Level Changes

15 s or Discretion NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD P 1 AS LR a Real Domestic Output AS 1 Self- Correction

16 s or Discretion NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD P 2 P 1 AS LR a b Real Domestic Output AD 2 AS 1 Self- Correction

17 s or Discretion NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD P 3 P 2 P 1 AS LR c a b AS 2 Real Domestic Output AD 2 AS 1 Self- Correction

18 DOES THE ECONOMY SELF-CORRECT? Classical Economics s or Discretion Mainstream Downward Wage Inflexibility Efficiency Wage Theory Greater Work Effort Lower Supervision Costs Reduced Job Turnover Insider-Outsider Theory and Relationships

19 s or Discretion RULES OR DISCRETION? In Support of Policy s Monetary Balanced Budget In Defense of Discretionary Stabilization Policy Discretionary Monetary Policy Discretionary Fiscal Policy Increased Macro Stability

20 s or Discretion RATIONALE FOR A MONETARY RULE Federal Reserve Increases Money Supply at the Long-Run Growth Rate of GDP P 1 P 2 AS LR1 AS LR2 Fed Increases The Money Supply Resulting in Q 2 Real Domestic Output, GDP

21 s or Discretion RATIONALE FOR A MONETARY RULE Federal Reserve Increases Money Supply at the Long-Run Growth Rate of GDP P 1 P 2 AS LR1 AS LR2 Q 2 Growth Without Inflation or Deflation AD 2 Real Domestic Output, GDP

22 RULES OR DISCRETION? Classical Economics s or Discretion Summary of Alternative s Chapter Conclusions 19-22

23 Copyright McGraw-Hill/Irwin 2002 classical view Keynesian view monetarism equation of exchange velocity real-business-cycle theory coordination failures rational expectations theory new classical economics price-level surprises efficiency wage insider-outsider theory monetary rule BACK END

24 : Classical Economics s or Discretion Supply And Demand Elasticities And Government-Set Prices Chapter 20