19 - 1Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 2Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 3Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 4Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 5Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 6Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 7Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 8Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 9Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instabi...
19 - 10Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 11Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 12Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 13Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 14Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 15Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 16Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 17Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 18Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 19Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 20Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 21Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
19 - 22Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
classical viewKeynesian viewmonetarismequation of exchangevelocityreal-business-cycle theorycoordination failuresrational ...
19 - 24Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro Instab...
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  1. 1. 19 - 1Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowDisputes Over MacroTheory and Policy19C H A P T E R
  2. 2. 19 - 2Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowCLASSICAL ECONOMICS AND KEYNESClassical EconomicsAdam Smith - 1776Laissez-faireThe Classical ViewVertical Aggregate Supply CurveStable Aggregate DemandReal Output Depends Upon…•Quantity of money possessed byhouseholds & businesses•Purchasing power of money isdetermined by the price level
  3. 3. 19 - 3Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowClassical TheoryP1Q1PriceLevelReal Domestic OutputASAD1
  4. 4. 19 - 4Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowClassical TheoryP1Q1P2PriceLevelReal Domestic OutputASAD1AD2
  5. 5. 19 - 5Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowCLASSICAL ECONOMICS AND KEYNESKeynesian EconomicsJohn Maynard Keynes, 1930sThe Keynesian ViewPrices and Wages DownwardlyInflexibleActive Government PolicyRequired to Stabilize theEconomyHorizontal Aggregate SupplyCurve to Full-EmploymentUnstable Aggregate Demand
  6. 6. 19 - 6Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowKeynesian ViewP1Q1PriceLevelReal Domestic OutputASAD1
  7. 7. 19 - 7Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowKeynesian ViewP1Q1PriceLevelReal Domestic OutputASAD1AD2Q2
  8. 8. 19 - 8Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowCAUSES OF MACRO INSTABILITYCa + Ig + Xn + G = GDPEquation of ExchangeM V = P Q = GDPChanges in InvestmentMainstream ViewMonetarist ViewAdverse Aggregate SupplyShocksStable Velocity
  9. 9. 19 - 9Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowCAUSES OF MACRO INSTABILITYInstability of Investment is theMain Cause of Output ChangesMonetary Policy is aStabilizing FactorMainstream ViewMonetarist ViewWith a Stable Velocity,Nominal GDP Depends Uponthe Money SupplySummary
  10. 10. 19 - 10Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowReal Business Cycle ViewReal-Business-Cycle TheoryP1PriceLevelReal Domestic OutputASLR1AD1Q1
  11. 11. 19 - 11Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowReal Business Cycle ViewReal-Business-Cycle TheoryP1Q2PriceLevelReal Domestic OutputASLR1AD1Q1ASLR2
  12. 12. 19 - 12Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowReal Business Cycle ViewReal-Business-Cycle TheoryP1Q2PriceLevelReal Domestic OutputASLR1AD1AD2Q1ASLR2RecessionWith StablePrice Levels
  13. 13. 19 - 13Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowReal Business Cycle ViewReal-Business-Cycle TheoryP1Q2PriceLevelReal Domestic OutputASLR1AD1AD2Q1ASLR2RecessionWith StablePrice LevelsCoordinationFailuresCoordinationFailures
  14. 14. 19 - 14Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowDOES THE ECONOMY SELF-CORRECT?New Classical ViewSelf-Correction?Rational Expectations TheorySpeed of AdjustmentUnanticipated Price Changes“Price Level Surprises”Fully Anticipated Price-LevelChanges
  15. 15. 19 - 15Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowQ1PriceLevelReal Domestic OutputAD1ASLRP1An increase in ADAS1Self-CorrectionaNEW CLASSICAL VIEW OF SELF-CORRECTION
  16. 16. 19 - 16Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowP2Q1PriceLevelReal Domestic OutputAD2AD1ASLRP1An increase in ADAS1Self-CorrectionabNEW CLASSICAL VIEW OF SELF-CORRECTION
  17. 17. 19 - 17Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowP2Q1PriceLevelReal Domestic OutputAD2AD1ASLRP1An increase in ADAS1AS2P3Self-CorrectionabcNEW CLASSICAL VIEW OF SELF-CORRECTION
  18. 18. 19 - 18Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowMainstream ViewDownward Wage InflexibilityEfficiency Wage Theory•Greater Work Effort•Lower Supervision Costs•Reduced Job TurnoverInsider-Outsider Theory andRelationshipsDOES THE ECONOMY SELF-CORRECT?
  19. 19. 19 - 19Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowRULES OR DISCRETION?Monetary RuleBalanced BudgetIn Support of Policy RulesIn Defense of DiscretionaryStabilization PolicyDiscretionary MonetaryPolicyDiscretionary Fiscal PolicyIncreased Macro Stability
  20. 20. 19 - 20Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowRATIONALE FOR A MONETARY RULEFederal Reserve Increases Money Supply atthe Long-Run Growth Rate of GDPP1Q1PriceLevelReal Domestic Output, GDPAD1Q2ASLR1Fed IncreasesThe MoneySupplyResulting in…ASLR2P2
  21. 21. 19 - 21Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowRATIONALE FOR A MONETARY RULEFederal Reserve Increases Money Supply atthe Long-Run Growth Rate of GDPP1Q1PriceLevelReal Domestic Output, GDPASLR2AD2AD1Q2ASLR1GrowthWithoutInflation orDeflationP2
  22. 22. 19 - 22Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowRULES OR DISCRETION?Summary of Alternative ViewsChapter Conclusions
  23. 23. classical viewKeynesian viewmonetarismequation of exchangevelocityreal-business-cycle theorycoordination failuresrational expectations theorynew classical economicsprice-level surprisesefficiency wageinsider-outsider theorymonetary ruleENDBACKCopyright McGraw-Hill/Irwin 2002
  24. 24. 19 - 24Copyright McGraw-Hill/Irwin, 2002Classical Economics and KeynesClassical TheoryKeynesian ViewCauses of Macro InstabilityReal Business Cycle ViewDoes the Economy Self-Correct?New Classical View of Self-CorrectionRules or DiscretionRationale for Monetary RuleKey TermsPreviousSlideNextSlideEndShowNext:SupplyAndDemandElasticities AndGovernment-Set PricesChapter 20

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