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Comparing Keynesianism and Monetarism: Obama's Macroeconomic Policies

Analyzing the debate between Keynesianism and Monetarism in macroeconomic policy, assessing their impacts on aggregate demand, fiscal policy, and monetary policy. Exploring the challenges and benefits of each theory in shaping economic outcomes and the role of political factors. Insights into the classical theory, Quantity Theory of Money, and the implications for modern economic policymaking.

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Comparing Keynesianism and Monetarism: Obama's Macroeconomic Policies

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Presentation Transcript

  1. Warm-Up

  2. Alternative Views on Macroeconomic Policy Chapter 33: Macroeconomics: Events and Ideas (pages 886-899)

  3. Is Obama a Keynesian?

  4. Classical Theory • Prices are fully flexible • Aggregate supply is vertical •  in MS =  in price levels

  5. Lack of Consensus • Economists disagreed on policy • No agreement on business cycles • Lead to new economic theories

  6. Keynesianism • Developed by John Maynard Keynes • Justified macroeconomic activism • Portions widely accepted (even by conservatives)

  7. Point #1: Aggregate Demand Impacts Output • Shift in AD changes more than prices • Changes to output also occur

  8. Point #2: “Animal Spirits” Shift AD • Bulls and bears impact AD • Low confidence = left shift in AD • High confidence = right shift in AD

  9. Point #3: Fiscal Policy Trumps Monetary Policy • Liquidity traps limit monetary policy • Interest rates must be > 0% • At low interest rates monetary policy falters • Fiscal policy is preferable • Not limited like monetary policy

  10. Video Interlude…

  11. Monetarism • Business cycles caused by money supply • Fiscal policy not as effective as Keynes believed

  12. Limits of Keynes • Fiscal policy  interest rates • Crowding out  investment • Multiplier effect is diminished

  13. Quantity Theory of Money • Constant growth in MS =  GDP • M * V = P * Y • Assumes V is constant •  V   nominal GDP • Worked for a while … M = Money supply V = Velocity of money P = Price level Y = Real GDP

  14. Problem with Monetarism

  15. Political Business Cycle • Politicians may abuse fiscal policy • Business cycle revolves around elections • Justifies • Limited discretionary fiscal policy • Independent central bank

  16. Keynes vs. Hayek Round 2

  17. Rational Expectations • Based on Classical Model • Decisions based on all available info • If you expect inflation you adjust • Aggregate supply is vertical

  18. Who’s This Hayek Guy… • Austrian economist • Business cycles caused by credit expansion • Distrusted central banks

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