Transcript Macroeconomic Conflict and Consensus

Macroeconomic
Conflict and
Consensus
Classical Economics
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Focused on long run only
Short run effects, like changes in output, were
unimportant
Awareness of business cycle, but no consensus on how to
respond to it
Keynesian Economics
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Emphasized importance of short run effects of shifts
SRAS upward-sloping, not vertical
Legitimized macroeconomic policy activism, use of
policy to smooth out the business cycle
Monetarism
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Believed GDP would grow steadily if money supply grew
steadily
Supported by Quantitative Theory of Money
MV=PQ
Wanted to see constant growth of money supply
regardless of economic conditions
Inflation and Unemployment
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Keynes believed macroeconomic policy could be used to
maintain full employment in the long run
One implication of the natural rate hypothesis is that
inflation will continue even in times of high
unemployment
Stability, not low level, should be the goal
Political Business Cycle
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Results of election tend to be tied to economic conditions
in the six months prior to the election
Why monetary policy is preferred by many economists
New Classical Macroeconomics
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Rational Expectations Theory – Individuals and
businesses make decisions based on all available
information
Real Business Cycle Theory – Slowdowns in
productivity growth (attributed to pauses in technology
progress) cause recessions
Modern Macroeconomic Consensus
General level of Consensus on Five Key Issues:
1.
Monetary policy – Effective in shifting AD to reduce
economic instability by affecting both price and output;
only ineffective in case of liquidity trap
2.
Fiscal policy – Effective in shifting AD; should not seek
balanced budget, as budget surpluses and deficits act as
a stabilizer
Modern Macroeconomic Consensus
General level of Consensus on Five Key Issues:
3.
NAIRU – Almost universally accepted as true; limited
ability of policy to keep unemployment below NAIRU,
but can help stabilize near this level
4.
Discretionary fiscal policy – Usually counterproductive
due to lags; most favor monetary policy except in
liquidity trap
Modern Macroeconomic Consensus
General level of Consensus on Five Key Issues:
5.
Discretionary monetary policy – Still an area of
contention, though there is agreement that central
bank should be independent
Unconventional monetary policies exercised during 2008
Financial Crisis were very controversial.
5 Key Questions of Macroeconomic Theory