s or Discretion C H A P T E R Disputes Over Macro Theory and Policy 19-1
s or Discretion 19-2 CLASSICAL ECONOMICS AND KEYNES Classical Economics Adam Smith - 1776 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
Classical Economics AS s or Discretion P 1 19-3 Real Domestic Output
Classical Economics AS s or Discretion P 1 P 2 AD 2 19-4 Real Domestic Output
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
Classical Economics AS s or Discretion P 1 19-6 Real Domestic Output
Classical Economics AS s or Discretion P 1 19-7 Q 2 Real Domestic Output AD 2
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
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
s or Discretion Real-Business-Cycle Theory AS LR1 P 1 19-10 Real Domestic Output
s or Discretion Real-Business-Cycle Theory AS LR2 AS LR1 P 1 19-11 Q 2 Real Domestic Output
s or Discretion 19-12 Real-Business-Cycle Theory AS LR2 AS LR1 P 1 Q 2 Recession With Stable s AD 2 Real Domestic Output
s or Discretion 19-13 Real-Business-Cycle Theory AS LR2 AS LR1 Coordination P 1 Failures Q 2 Recession With Stable s AD 2 Real Domestic Output
DOES THE ECONOMY SELF-CORRECT? Classical Economics s or Discretion 19-14 New Classical? Rational Expectations Theory Speed of Adjustment Unanticipated Price Changes Surprises Fully Anticipated Price-Level Changes
s or Discretion 19-15 NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD P 1 AS LR a Real Domestic Output AS 1 Self- Correction
s or Discretion 19-16 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
s or Discretion 19-17 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
DOES THE ECONOMY SELF-CORRECT? Classical Economics s or Discretion 19-18 Mainstream Downward Wage Inflexibility Efficiency Wage Theory Greater Work Effort Lower Supervision Costs Reduced Job Turnover Insider-Outsider Theory and Relationships
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 19-19 Increased Macro Stability
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 19-20 Q 2 Real Domestic Output, GDP
s or Discretion 19-21 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
RULES OR DISCRETION? Classical Economics s or Discretion Summary of Alternative s Chapter Conclusions 19-22
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
: Classical Economics s or Discretion Supply And Demand Elasticities And Government-Set Prices 19-24 Chapter 20