Transcript Keynes v Hayek day 1 notes 2015 without moviex

Inflationary and Recessionary Gaps- Steering the Market
Economic
Activity
Contraction (Recession 2 quarters of contraction)
1. GDP shrinks
2. Employment levels fall
3. Price level increases slow down of even fall
Potential
GDP
(Full Employment)
Expansion
Time (years)
1. GDP grows
2. Employment rise
3. Price level increases faster
Topic
Why are there
Economic downturns?
LRAS
Solutions to
Recession?
How should the
government carry out
its economic role to
accomplish the goals
of full employments,
increased production,
and stable prices?
Keynes
Hayek
How should the government carry
out its economic role to accomplish
the goals of full employments,
increased production, and stable
prices?
How would Keynes answer?
How would Hayek answer?
How would you answer?
The Aggregate Market- The Basics
Long Run Aggregate Supply (LRAS)
Aggregate- all together (total)
Price Level
Aggregate Supply (AS)
Measure
of
Inflation
The purpose of this graph is to look at countries.
Total supply and demand at full employment
Pe
Aggregate Demand (AD)
Qe
G.D.P real
Qy
employment
Qy= Quantity at full employment
The law of demand is the same.
There is an inverse relationship- PL up, AD down, PL down AD up
The law of supply is the same
There is a direct relationship- PL up, AS up, PL down AS down
AD= Aggregate Demand
AD= GDP= C + I + G + NX
You may find it amazing how a graph can be
interpreted in so many different ways.
Learning the basics of the graph will provide you
an opportunity to learn fiscal and monetary
policy in different ways.
Why do we have Economic Downturns?
According to Keynes. . .
Because people follow their animal spirits (self-preservation).
During economic downturns individuals save more, demand less, and spend less. (paradox of thrift)
Workers refuse to accept lower wages and suppliers refuse to accept lower prices.
(prices and wages are sticky).
All of this results in lower Aggregate Demand, lower GDP, and lower employment. But not lower prices.
According to Hayek. . .
Why do we have Economic Downturns?
Recessions are natural and necessary for the economy to expand and to cleanse itself.
If the price mechanism is allowed to function the temporary set backs of recession will be offset by future
gains and economic expansion in the long-run.
When allowed to be, prices and wages are flexible and prices drop in both the product and resource
markets.
People’s savings increase loanable funds in banks and lowers interest rates. Companies can focus on long
term investments. Interests coordinates savings and time. When interest rates are low there will be long
term investments
During expansion people spend more and save less- less loanable funds for business investments resulting
in higher interest rates and short term investments that will result in quick paybacks. During contraction
people save more and spend less- more loanable funds for business investments resulting in lower
interest rates. This prompts business to create more lower order goods and less higher order goods.
When these goods are higher level goods they consumer will be ready.
During expansion if the Federal Reserve keeps interest rates artificially lower there will be an overuse of
scarce resources caused by both by over consumption and over investment. People enter markets that
they would not normally enter. Prices soar and the recession is worse than it would have otherwise been.
There is higher risk of mal-investments.
Recessions in the 20th and 21st century are worse because laws prevent prices from working and the
federal reserve artificially lowers interest rates.
What does the Long Run Aggregate Supply Curve look like?
According to Keynes . . .
What does the Long Run Aggregate Supply Curve look like?
According to Keynes . . .
What does the Long Run Aggregate Supply Curve look like?
According to Hayek . . .
People are motivated to keep their jobs. They will accept lower wages and prices will fall.
They will either do this voluntarily or they will be forced to do it by looking for a new job.
Solutions?
According to Keynes. . .
Boost Aggregate Demand. Increase the C, I, or the G.
Start spending now. The markets will not reach equilibrium not even in the long-run. In the long-run we
are all dead.
The money’s impact will multiply as more and more people spend. An upward spiral.
Fiscal policy (Congress) to decrease taxes and increase spending.
Deficit spending is acceptable.
Monetary policy (the federal reserve) to lower interest rates and increase loanable funds.
According to Keynes this will not impact price until full employment is reached.
Solutions?
According to Hayek. . .
Markets will reach equilibrium if price is allowed to function.
Remove senseless regulations and taxes which prevent true growth. We produce so we can buy (Say’s
law).
When supply increases- prices will decrease which will increase demand.
Capitalism is a profit and loss system don’t penalize people who do things right and don’t bailout those
who waste resources.
You cannot forget about people’s motivations and action. Thinking that you can simply fix the economy
by spending and at the same time ignore human action and motivations is the Pretence of Knowledge.
Aggregate Supply – So what Model is correct?
They Both have some
valid points
LRAS
P.L.
Classical
Phase
When in the Classical Phase
The economy is operating at full employment
Pe
Any and all increase in AD will result in an
increase in price and in increase in inflation
Intermediate
Phase
Keynesian
Phase
AD
AD
AD
Qy
full
G.D.P real
When in the Keynesian Phase
When in the Intermediate Phase
Output can increase with no change in price.
No increase in price level, no inflationary
pressure, spare room to grow.
As AD approaches the curve
An increase in AD and decrease in
unemployment
Result in a gradual increase of price and
some inflationary pressure
Price level
How should the government carry
out its economic role to accomplish
the goals of full employments,
increased production, and stable
prices?
How would Keynes answer?
How would Hayek answer?
How would you answer?
Create Haikus- 3 lines 5-7-5
3 for Hayek and 3 for Keynes
Each Haiku should have identifying concepts, make them
informative but don’t include the person’s name.
Please email me the haikus prior to the end of class and I
will create a power point of some of the best Haikus. They
will be used tomorrow as a review.
The following are a couple of good examples.
Macro not Mirco
Increase Government Spending
Fiscal Policy
Keynes
Flexibility
Prices and Wages changing
Equilibrium
Hayek
Animal Spirits
Confidence and Trust Creates
Growth and Contraction
Keynes
Equilibrium
Real Production is Real Wealth
Increase in Savings
Hayek