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Disputes Over Macro Theory and Policy
19 C H A P T E R Disputes Over Macro Theory and Policy
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Vertical Aggregate Supply Curve Stable Aggregate Demand
CLASSICAL ECONOMICS AND KEYNES Classical Economics Adam Smith Laissez-faire The Classical View Vertical Aggregate Supply Curve Stable Aggregate Demand Real Output Depends Upon… Quantity of money possessed by households & businesses Purchasing power of money is determined by the price level
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Classical Theory AS P1 Price Level AD1 Q1 Real Domestic Output
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Classical Theory AS P1 Price Level P2 AD1 AD2 Q1 Real Domestic Output
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Keynesian Economics John Maynard Keynes, 1930s The Keynesian View
CLASSICAL ECONOMICS AND KEYNES Keynesian Economics John Maynard Keynes, 1930s The Keynesian View Prices and Wages Downwardly Inflexible Active Government Policy Required to Stabilize the Economy Horizontal Aggregate Supply Curve to Full-Employment Unstable Aggregate Demand
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Keynesian View AS P1 Price Level AD1 Q1 Real Domestic Output
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Keynesian View AS P1 Price Level AD1 AD2 Q2 Q1 Real Domestic Output
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Mainstream View Ca + Ig + Xn + G = GDP Monetarist View M V = P Q = GDP
CAUSES OF MACRO INSTABILITY Mainstream View Changes in Investment Ca + Ig + Xn + G = GDP Adverse Aggregate Supply Shocks Monetarist View Equation of Exchange M V = P Q = GDP Stable Velocity
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Summary Mainstream View Monetarist View
CAUSES OF MACRO INSTABILITY Summary Mainstream View Instability of Investment is the Main Cause of Output Changes Monetary Policy is a Stabilizing Factor Monetarist View With a Stable Velocity, Nominal GDP Depends Upon the Money Supply
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Real Business Cycle View
Real-Business-Cycle Theory ASLR1 Price Level P1 AD1 Q1 Real Domestic Output
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Real Business Cycle View
Real-Business-Cycle Theory ASLR2 ASLR1 Price Level P1 AD1 Q2 Q1 Real Domestic Output
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Real Business Cycle View
Real-Business-Cycle Theory ASLR2 ASLR1 Recession With Stable Price Levels Price Level P1 AD1 AD2 Q2 Q1 Real Domestic Output
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Coordination Failures
Real Business Cycle View Real-Business-Cycle Theory Coordination Failures ASLR2 ASLR1 Recession With Stable Price Levels Price Level P1 AD1 AD2 Q2 Q1 Real Domestic Output
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New Classical View Self-Correction? Rational Expectations Theory
DOES THE ECONOMY SELF-CORRECT? New Classical View Self-Correction? Rational Expectations Theory Speed of Adjustment Unanticipated Price Changes “Price Level Surprises” Fully Anticipated Price-Level Changes
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An increase in AD Self- Correction ASLR AS1 P1 AD1 Q1 Price Level a
NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD ASLR AS1 Self- Correction Price Level P1 a AD1 Q1 Real Domestic Output
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An increase in AD Self- Correction ASLR AS1 P2 P1 AD2 AD1 Q1
NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD ASLR AS1 Self- Correction Price Level P2 b P1 a AD2 AD1 Q1 Real Domestic Output
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An increase in AD Self- Correction AS2 ASLR AS1 P3 P2 P1 AD2 AD1 Q1
NEW CLASSICAL VIEW OF SELF-CORRECTION An increase in AD AS2 ASLR AS1 Self- Correction Price Level P3 c P2 b P1 a AD2 AD1 Q1 Real Domestic Output
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Mainstream View Downward Wage Inflexibility Efficiency Wage Theory
DOES THE ECONOMY SELF-CORRECT? Mainstream View Downward Wage Inflexibility Efficiency Wage Theory Greater Work Effort Lower Supervision Costs Reduced Job Turnover Insider-Outsider Theory and Relationships
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Discretionary Monetary Policy Discretionary Fiscal Policy
RULES OR DISCRETION? In Support of Policy Rules Monetary Rule Balanced Budget In Defense of Discretionary Stabilization Policy Discretionary Monetary Policy Discretionary Fiscal Policy Increased Macro Stability
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Fed Increases The Money Supply Resulting in…
RATIONALE FOR A MONETARY RULE Federal Reserve Increases Money Supply at the Long-Run Growth Rate of GDP ASLR1 ASLR2 Fed Increases The Money Supply Resulting in… Price Level P1 P2 AD1 Q1 Q2 Real Domestic Output, GDP
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Growth Without Inflation or Deflation
RATIONALE FOR A MONETARY RULE Federal Reserve Increases Money Supply at the Long-Run Growth Rate of GDP ASLR1 ASLR2 Growth Without Inflation or Deflation Price Level P1 P2 AD2 AD1 Q1 Q2 Real Domestic Output, GDP
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RULES OR DISCRETION? Summary of Alternative Views Chapter Conclusions
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KEY TERMS classical view Keynesian view monetarism
equation of exchange velocity real-business-cycle theory coordination failures rational expectations theory new classical economics price-level surprises efficiency wage insider-outsider theory monetary rule KEY TERMS Copyright McGraw-Hill/Irwin 2002 BACK END
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Supply And Demand Elasticities And Government-Set Prices Chapter 20
Next: Supply And Demand Elasticities And Government-Set Prices Chapter 20
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