2. Eco 200 – Principles of Macroeconomics Chapter 16: Alternative macroeconomic models

3. Alternative macroeconomic models Fixed-price Keynesian model New Keynesian model Monetarist model New classical model

4. Fixed-price Keynesian model Assumes a constant price level

5. 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

6. Fixed-price Keynesian model

7. Policymakers’ role in the fixed- price Keynesian model private economy is inherently unstable

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

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

10. New Keynesian model New Keynesians argue that prices and wages are not flexible (especially in a downward direction) in the short run

11. New Keynesian model New Keynesians 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)

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

13. Monetarist economics Money supply affects output and the price level in the short run

14. 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.

15. 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

16. Policymakers’ role under monetarist economics Believe that discretionary policy is inherently destabilizing due to long and variable lags

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

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

19. New classical model relies on rational expectations

20. New classical model relies on rational expectations wages and other resource prices are assumed to respond immediately to any anticipated policy change

21. New classical model

22. Policymakers’ role under the new classical model discretionary policy is not effective

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