PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 13 New Keynesians versus Real-Business- Cycle Theorists

Copyright © 2004 South-Western. All rights reserved.13–2 Fundamental Issues 1.What has motivated macroeconomists to propose additional theories of how the economy functions? 2.What are the key features of new Keynesian theories? 3.What are coordination failures, and why do new Keynesians believe that they may be important?

Copyright © 2004 South-Western. All rights reserved.13–3 Fundamental Issues (cont’d) 4.How do real-business-cycle theorists explain short-term fluctuations in real output? 5.What is quantitative theory, and why is it so controversial?

Copyright © 2004 South-Western. All rights reserved.13–4 Source: Robert Gordon, “What Is New-Keynesian Economics?” Journal of Economic Literature 28 (1990): 1151–1171. Figure 13–1 Measures of Price Inertia for Five Industrialized Nations

Copyright © 2004 South-Western. All rights reserved.13–5 Source: Robert Gordon, “What Is New-Keynesian Economics?” Journal of Economic Literature 28 (1990): 1151–1171. Table 13–1 Declines in Prices and Production for Selected U.S. Industries, 1929–1933

Copyright © 2004 South-Western. All rights reserved.13–6 Figure 13–2 Profit Gains and Losses from a Firm’s Failure to Change Its Price When Demand for Its Product Declines

Copyright © 2004 South-Western. All rights reserved.13–7 Figure 13–3 Technology Shocks and Real Output Variations

Copyright © 2004 South-Western. All rights reserved.13–8 Figure 13–4 A Sample Real Business Cycle

Copyright © 2004 South-Western. All rights reserved.13–9 Figure 13–5 Labor Market Flexibility and Unemployment Rates in Selected Nations Source: Rafael Di Tella and Robert MacCulloch, “The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data,” Harvard Business School, November 1998.

Copyright © 2004 South-Western. All rights reserved.13–10 Source: Cedric Tille and Kei-Mu Yi, “Curbing Unemployment in Europe: Are There Lessons from Ireland and the Netherlands?” Federal Reserve Bank of New York Current Issues in Economics and Finance 7 (5, May 2001); Organization for Economic Cooperation and Development; authors’ estimates. Figure13–6 Unemployment Rates in Ireland and the Netherlands