Eco 200 – Principles of Macroeconomics

1. Eco 200 – Principles of Macroeconomics Chapter 16: Alternative macroeconomic models

2. Alternative macroeconomic models • Fixed-price Keynesian model • New Keynesian model • Monetarist model • New classical model

3. Fixed-price Keynesian model • Assumes a constant price level

4. Fixed-price Keynesian model • Assumes a constant price level • This model was popular during and immediately after during the Great Depression • little concern about inflation

5. Fixed-price Keynesian model

6. Policymakers’ role in the fixed-price Keynesian model • private economy is inherently unstable

7. Policymakers’ role in the fixed-price Keynesian model • private economy is inherently unstable • advocates active role for government in stabilizing the economy

8. New Keynesian model • Recognizes that the price level is not constant

9. New Keynesian model • New Keynesians argue that prices and wages are not flexible (especially in a downward direction) in the short run

10. New Keynesian model • New Keynesians argue that prices and wages are not flexible (especially in a downward direction) in the short run • Firms respond to a reduction in the demand for output by cutting production (and labor use), not prices (and wages)

11. Policymakers’ role in the New Keynesian model • Essentially the same as for traditional Keynesians (but with more attention paid to inflation)

12. Monetarist economics • Money supply affects output and the price level in the short run

13. Monetarist economics • Money supply affects output and the price level in the short run • Economy is believed to be inherently stable, with rapid self-adjustment.

14. Monetarist economics • Money supply affects output and the price level in the short run • Economy is believed to be inherently stable, with rapid self-adjustment. • Lags: • recognition lag • reaction lag • effect lag

15. Policymakers’ role under monetarist economics • Believe that discretionary policy is inherently destabilizing due to long and variable lags

16. Policymakers’ role under monetarist economics • Believe that discretionary policy is inherently destabilizing due to long and variable lags • Prefer a reliance on fixed rules

17. New classical model • Classical model was the dominant macroeconomic theory until the Keynesian revolution

18. New classical model • relies on rational expectations

19. New classical model • relies on rational expectations • wages and other resource prices are assumed to respond immediately to any anticipated policy change

20. New classical model

21. Policymakers’ role under the new classical model • discretionary policy is not effective

22. Policymakers’ role under the new classical model • discretionary policy is not effective • prefer the use of fixed rules (with credible policy announcements)