1. MODERN ECONOMICS A Survey of Contemporary Thought Based on Schools Briefs in the Economist, 03 November 1990 to 09 March 1991 and 12 February to 02 April 1994.

2. PARADIGM LOST Macroeconomic Analysis: the Paradigm Classic Keynes Meltdown New Classical/New Keynesian Schools

3. Macroeconomic Analysis: The Closed Economy Paradigm r y LM IS

4. The LM Curve EQUILIBRIUM IN THE MONEY MARKET If the interest rate rises, the demand for spendable money, as opposed to higher interest, non-spendable assets, falls. Hence, if we are to experience equilibrium, the supply must also fall, an event that occurs if income falls.

5. The higher interest rate makes bonds more attractive because of the yield. But, bond prices are lower, making them more attractive also because of the higher probability of capital gain.

6. The IS Curve EQUILIBRIUM IN THE GOODS & SERVICES MARKET If income (output) rises, saving & tax payments rise; demand increases fall short of the output increases. This creates an excess supply of goods & services, which can be offset by rising demand, an event that occurs if interest rates fall.

7. Factors Causing LM to Shift Changes in the supply of money. Changes in the domestic price level relative to the stock of money. Changes in the demand for money or in liquidity preference.

8. Shifting the LM Curve r y LM The shift may be considered to the left or up if M/P (the real value of the money stock) falls. The FED’s recent tightening of monetary policy reduced M relative to P and put upward pressure on interest rates. Monetary tightness may also result from rising demand by the public to hold money balances. This is the Japanese situation today. Similarly, the shift may be to the right or down if M/P rises. Expansionary monetary policy by the FED or Central Bank. Economy wide reductions in the demand for money will also cause the LM to shift to the right or down.

9. Factors Causing IS to Shift Shifts in the demand curves for investment or consumption goods relative to the interest rate or income. Changes in government spending. Changes in tax rate policy. Changes in price levels.

10. Shifting the IS Curve r y

11. Macroeconomic Analysis: the Open Economy Paradigm E y DD AA

12. The AA Curve MONETARY EQUILIBRIUM If Inland currency appreciates (E falls), expectation of future depreciation is stronger. Markets will adjust with higher Inland interest rates and reduced demand for money. Income growth, if forthcoming, will restore money demand and monetary equilibrium.

13. The DD Curve OUTPUT MARKET EQUILIBRIUM If Inland currency appreciates (E falls), X - M falls, creating excess supplies in Inland goods & services markets. Output reduction, if forthcoming, will eliminate the excesses.

14. Factors Causing DD to Shift Changes in Government Spending Changes in Tax Policies Changes in Investment or Consumption Changes in Inland price levels Changes in Outland price levels Changes in relative Outland/Inland goods preferences.

15. Factors Causing AA to Shift Changes in the Money Supply Changes in Inland price levels Changes in the expected long-run exchange rate Changes in Outland interest rates Changes in real money demand.

16. Classic Keynes Demand Side: Functions concerning investment, consumption, government demand and net exports. Supply Side: Functions concerning labor supply & demand related to the real wage rate. The Phillips curve and its inflation/ unemployment trade-off.

17. CONSUMPTION ACCORDING TO KEYNES 45° C + I + G + CA C = Consumption Y = C + I + G + CA INCOME OR OUTPUT C I G CA

18. MODEL WITH INVESTMENT (I or G or CA) GROWTH 45° C + I' + G + CA C + I + G + CA Y' = C + I' + G + CA INCOME OR OUTPUT C I G CA YY' Y = C + I + G + CA

19. INVESTMENT & SAVING + THE GOVERNMENT BUDGET r I & S I I + G S S + T

20. The {S + T} & {I + G} Curves: Assume that Income rises r I, S, T & G S+T S'+T' I+G I’+G' If income rises, saving and tax payments rise sharply. However, investment rises mildly & government spending falls (why?) Lower interest rate goes with higher income at equilibrium points.

21. Labor, Capital & Production: Full Employment Real Output W/p Real wage rate N Labor Force Demand for Labor Supply of Labor N F {Full Employment} (W/p) F At full employment, the corresponding level of output (y F ) is called Full Employment Real Output. Why is the supply curve backward bending?

22. The Complete Model r y yFyF IS LM r

23. The Phillips Curve Inflation Unemployment P1P1 8% 4% P2P2 3% 6%

24. Meltdown If prices rise, real wages fall inducing an increase in the quantity of labor demanded. If labor is oblivious to these changes, the increased demand will induce an increase in supply, and unemployment will fall.

25. Is Labor Oblivious? Not perfectly rational, but able to learn from their mistakes. Policies designed to lower real wages to induce employment lose effectiveness as rapidly as labor is able to learn. That’s fast!