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The roots of modern macroeconomics
 

The roots of modern macroeconomics

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The roots of modern macroeconomics The roots of modern macroeconomics Presentation Transcript

  • The Roots of Modern MacroeconomicsSetting the Scene: Three Key Issues
  • THREE KEY ISSUES• Issue 1: Flexibility of prices and wages – the right: flexible prices and wages – the left: price and wage rigidities• Issue 2: Flexibility of aggregate supply – the right: aggregate supply determined independently of aggregate demand
  • Different aggregate supply curves: (a) ASPrice level O Y National output
  • Different aggregate supply curves: (a) ASPrice level P1 AD1 O Y National output
  • Different aggregate supply curves: (a) ASPrice level P2 P1 AD2 AD1 O Y National output
  • THREE KEY ISSUES• Issue 1: Flexibility of prices and wages – the right: flexible prices and wages – the left: price and wage rigidities• Issue 2: Flexibility of aggregate supply – the right: aggregate supply determined independently of aggregate demand – the left: aggregate supply responsive to changes in aggregate demand
  • Price level Different aggregate supply curves: (b) P AS O National output
  • Price level Different aggregate supply curves: (b) P AS AD1 O Y1 National output
  • Price level Different aggregate supply curves: (b) P AS AD2 AD1 O Y1 Y2 National output
  • THREE KEY ISSUES• Issue 1: Flexibility of prices and wages – the right: flexible prices and wages – the left: price and wage rigidities• Issue 2: Flexibility of aggregate supply – the right: aggregate supply determined independently of aggregate demand – the left: aggregate supply responsive to changes in aggregate demand – some consensus on nature of short-run AS curve
  • Different aggregate supply curves: (c) ASPrice level O National output
  • Different aggregate supply curves: (c) ASPrice level P1 AD1 O Y1 National output
  • Different aggregate supply curves: (c) ASPrice level P2 P1 AD2 AD1 O Y1 Y2 National output
  • THREE KEY ISSUES• Issue 3: The role of expectations in the working of the market – the right: expectations adjust rapidly to changes in prices – the left: expectations of prices depend on expectations of output and employment
  • The Roots of Modern Macroeconomics ClassicalMacroeconomics
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds
  • The market for loanable funds Saving (supply)Rate of interest Investment (demand) O Quantity of loanable funds
  • The market for loanable funds Saving (supply)Rate of interest r1 Investment (demand) O Quantity of loanable funds
  • The market for loanable funds Saving (supply)Rate of interest r1 Investment (demand) O Quantity of loanable funds
  • The market for loanable funds Saving (supply)Rate of interest r2 Investment (demand) O Quantity of loanable funds
  • The market for loanable funds Saving (supply)Rate of interest r2 Investment (demand) O Quantity of loanable funds
  • The market for loanable funds Saving (supply)Rate of interest re Investment (demand) O Quantity of loanable funds
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard – Say’s law
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard – Say’s law• Classical analysis of prices and inflation
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard – Say’s law• Classical analysis of prices and inflation – the quantity theory of money
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard – Say’s law• Classical analysis of prices and inflation – the quantity theory of money – the equation of exchange: MV = PY
  • CLASSICAL MACROECONOMICS• Classical analysis of output and employment – markets clear • labour market • market for loanable funds • market for imports and exports: the gold standard – Say’s law• Classical analysis of prices and inflation – the quantity theory of money – the equation of exchange: MV = PY – implications for monetary policy
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s
  • UK unemployment and inflation: 1919 − 38 24 15 Unemployment 22 10 20Unemployment (% of workforce) 18 5 16 0 Inflation (%) 14 12 -5 10 -10 8 6 -15 4 -20 2 0 -25 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937
  • UK unemployment and inflation: 1919 − 38 24 15 Unemployment 22 10 20Unemployment (% of workforce) 18 Inflation 5 16 0 Inflation (%) 14 12 -5 10 -10 8 6 -15 4 -20 2 0 -25 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard – effects on the economy
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard – effects on the economy – the policy response
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard – effects on the economy – the policy response – classical rejection of public works
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard – effects on the economy – the policy response – classical rejection of public works • the fear of inflation
  • CLASSICAL MACROECONOMICS• The Great Depression and the return to the gold standard – the depression of the 1920s – return to the gold standard – effects on the economy – the policy response – classical rejection of public works • the fear of inflation • the problem of crowding out
  • The effect of printing extra money: the classical analysis ASPrice level P2 P1 AD2 AD1 O Q1 National output
  • The Roots of Modern Macroeconomics The Keynesian Revolution
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand
  • The problem of demand deficiency in the labour market ASLReal wage rate (W / P) W1 ADL1 ADL2 O Quantity of labour
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment
  • Disequilibrium in the market for loanable funds Savings 1 Savings 2Rate of interest r1 r2 Investment O Quantity of loanable funds
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment – rejection of simple quantity theory
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment – rejection of simple quantity theory – rejection of a balanced budget
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment – rejection of simple quantity theory – rejection of a balanced budget• Keynes’ analysis of employment and inflation
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment – rejection of simple quantity theory – rejection of a balanced budget• Keynes’ analysis of employment and inflation – the importance of aggregate demand
  • The effects of increases in aggregate demand on national output ASPrice level O YP National output
  • The effects of increases in aggregate demand on national output ASPrice level AD4 AD3 AD1 AD2 O Y1 Y2 Y3 Y4 YP National output
  • THE KEYNESIAN REVOLUTION• Keynes’ rejection of classical theory – rigidities in the labour market – the problem of deficiency of demand – rejection of increased saving as a means of increasing investment – rejection of simple quantity theory – rejection of a balanced budget• Keynes’ analysis of employment and inflation – the importance of aggregate demand – the multiplier process
  • The circular flow of income
  • The circular flow of income Cd
  • The circular flow of incomeIncomes Cd
  • The circular flow of incomeIncomes Cd W=S+T+M
  • The circular flow of income J=I+G+XIncomes Cd W=S+T+M
  • The circular flow of income J=I+G+XIncomes Cd W=S+T+M
  • The circular flow of income J=I+G+XIncomes Cd W=S+T+M
  • The circular flow of income J=I+G+XIncomes Cd W=S+T+M
  • THE KEYNESIAN REVOLUTION• Keynes’ policy recommendations – demand management by fiscal and monetary policies• Keynesian policies in 1950s and 60s – stop–go policies – criticisms of short-term demand management – the breakdown of the Phillips curve
  • The Roots of Modern MacroeconomicsThe Monetarist– Keynesian Debate
  • THE MONETARIST–KEYNESIAN DEBATE• The monetarist counter-revolution – the restatement of the quantity theory – rejection of Keynesian demand management policies – the problem of inflationary expectations – reappraisal of the Phillips curve • unemployment • inflation
  • Inflation (%) The monetarist version of the long-run Phillips curve O Un Unemployment
  • (a) Keynesian aggregate supply curve ASPrice level O Ymax YP National output
  • Inflation (%) (b) Keynesian Phillips curve O Umin Unemployment
  • THE MONETARIST–KEYNESIAN DEBATE• The monetarist counter-revolution – the restatement of the quantity theory – rejection of Keynesian demand management policies – the problem of inflationary expectations – reappraisal of the Phillips curve • unemployment • inflation – monetarist policies
  • THE MONETARIST–KEYNESIAN DEBATE• The monetarist counter-revolution – the restatement of the quantity theory – rejection of Keynesian demand management policies – the problem of inflationary expectations – reappraisal of the Phillips curve • unemployment • inflation – monetarist policies – attempts at such policies in the 1980s
  • THE MONETARIST–KEYNESIAN DEBATE• Modern-day Keynesians – inflation – unemployment – structural problems – hysteresis • low capital stock • deskilling • insiders and outsiders – criticisms of monetarism – Keynesian policy proposals
  • The Roots of Modern MacroeconomicsThe Current Position
  • THE CURRENT POSITION• The current range of views – new classical / rational expectations school – moderate monetarists – moderate Keynesians (new Keynesians) – extreme Keynesians – the radical left – eclectic economists
  • THE CURRENT POSITION• A mainstream consensus? – short-run effects of changes in AD – long-run effects of changes in AD – no simple trade-off between inflation and unemployment – role of expectations – effects of excessive growth in the money supply – importance of supply-side policies – erosion of governments power by the process of globalisation