1. History and Alternate Views of Macroeconomics and The Modern Macroeconomic Consensus
Lesson 36
Sections 35, 36

2. Classical Macroeconomics (35)
Money and Price Level
Classical economists claim that increasing the money supply has no effect on output, and only increased prices in the long run, and the aggregate supply is vertical
Keynes: “in the long run, we are all dead.”
The Business Cycle
During the Great Depression there was no complete theory of business cycles, and in the absence of business cycle theory most economists at the time rejected doing anything about the Depression because they thought any action would just make it worse.
The Great Depression and the Keynesian Revolution
Keynes’s Theory
Keynes believed that aggregate supply is curved and focused on short run aggregate demand and supply to show how changes in demand can change output
Policy to Fight Recessions
Keynes theories proposed to smooth out the business cycle by spending during recession and restraint during growth. Classical economists strongly disagreed.

3. Challenges to Keynesian Economics
The Revival of Monetary Policy
Milton Friedman: policy should be set by monetary policy, not fiscal policy because of politics (ie. Claiming that monetary policy was non-political*)
Monetarism
GDP will grow if the money supply expands (ex. target 3%)
Discretionary Monetary Policy
Changes in interest rates or money supply
Quantity Theory of Money
Amount of money in supply as a ratio of GDP
Velocity of Money
Inflation and the Natural Rate of Unemployment
Natural Rate Hypothesis
Back to the theory that aggregate supply is vertical
Milton Friedman created this theory to discredit Keynesianism using the 1970’s stagflation as a proof (but this was caused by external crisis, not internal)
The Political Business Cycle
Your book once again tries to make the argument that fiscal policy is too political and that independent central banks were much better to handle these issues

5. Rational Expectation, Real Business Cycles, and New Classical Macroeconomics
Once again trying to reject Keynesianism to go back to classical theory
Rational Expectations
The Rational Actor Theory
New Keynesian Economics
Keynesian sticky prices
Real Business Cycles
Real Business Cycle Theory
The claim that aggregate supply is vertical and that recessions and growth occur when the aggregate supply curve moves (again rejecting Keynesianism)

6. The Modern Consensus(?) (35)
Classical Macroeconomics
Keynesian Macroeconomics
Monetarism
Modern Consensus
Is Expansionary Monetary Policy Helpful in Fighting Recessions? No
Not Very
Yes
Yes*
Is Expansionary Fiscal Policy effective in Fighting Recessions?
Can Monetary and/or Fiscal Policy Reduce Unemployment in the Long Run?
Should Fiscal Policy be Used in a Discretionary Way?
No*
Should Monetary Policy be Used in a Discretionary Way?
Still In Dispute
* Except in special cases

7. The Modern Consensus Central Bank Targets Asset Prices
Some banks target a specific number for inflation
Asset Prices
Should there be intervention if asset prices are in a bubble? No consensus.
Unconventional Monetary Policies
During the 2008 crisis, The Fed lent huge sums of money, bought commercial paper (bonds), and large scale purchases of private assets. (still controversial)
The Clean Little Secret of Macroeconomics
We all agree? On many things yes. (actually less agreement than the book suggests)