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
This model was popular during and immediately after during the Great Depression
little concern about inflation

4. Fixed-price Keynesian model

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

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

7. New Keynesian model
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)

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

9. 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

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

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

12. New classical model Relies on rational expectations
Wages and other resource prices are assumed to respond immediately to any anticipated policy change.

13. New classical model

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