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Warm-Up

Warm-Up. Alternative Views on Macroeconomic Policy. Chapter 33: Macroeconomics: Events and Ideas (pages 886-899). Is Obama a Keynesian?. Classical Theory. Prices are fully flexible Aggregate supply is vertical  in MS =  in price levels. Lack of Consensus.

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Warm-Up

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  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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