Module History and Alternative Views of Macroeconomics KRUGMAN'S MACROECONOMICS for AP* 35 Margaret Ray and David Anderson John Maynard Keynes & Milton Friedman

What you will learn in this Module : Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression How Keynes and the experience of the Great Depression legitimized macroeconomic policy activism What monetarism is and its views about the limits of monetary policy How challenges led to a revision of Keynesian ideas and the emergence of the new classical macroeconomics

Classical Macroeconomics: Money and the Price Level Classical Macroeconomics: Money and the Price Level %∆ M = % ∆ PL Short-Run Effects Unimportant Focus on the Long- Run Keynes - “ (in the long run) we are all dead.”

Classical Macroeconomics: The Business Cycle Classical Macroeconomics: The Business Cycle The Business Cycle No theory of business cycles Lack of consensus Necessity is the mother of invention

Keynes’s Theory Keynes’s Theory The General Theory Classical View Keynesian View “Animal Spirits”

Keynes’s Theory Keynes’s Theory Classical Theory KeynesianTheory

Challenges to Keynesian Economics: The Revival of Monetary Policy Challenges to Keynesian Economics: The Revival of Monetary Policy A Monetary History of the United States, Great Depression caued by Fed contracting the money supply Monetary policy is important - less political University of Chicago Economist, Milton Friedman

Challenges to Keynesian Economics: Monetarism Challenges to Keynesian Economics: Monetarism Monetarism Discretionary Policies - bad Crowding Out Monetary Policy Rule Quantity Theory of Money, MV = PY Velocity of Money Erratic Velocity undermines Monetarism

Challenges to Keynesian Economics: Inflation and the Natural Rate of Unemployment Natural Rate Hypothesis Limit to Discretionary Policy Stagflation of 1970s proof of Hypothesis Natural Rate widely accepted

Challenges to Keynesian Economics: The Political Business Cycle Consequences of Keynes on Politics Election Day Economics Political Business Cycle The need for central bank independence President Obama and Senator McCain

Rational Expectations, Real Business Cycles, and New Classical Macroeconomics New Classical Macroeconommics Rational Expectations New Keynesian Economics Real Business Cycle Theory