1 / 17

Macroeconomic Controversies

Macroeconomic Controversies. Classical View. Vertical AS at Qf =full-capacity output Why? 1) Say’s Law (supply creates its own demand) + 2) responsive, flexible prices + wages AS doesn’t change in response to price changes: real profits and output unchanged. Stable AD.

felicia-armstrong
Télécharger la présentation

Macroeconomic Controversies

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Macroeconomic Controversies

  2. Classical View • Vertical AS at Qf=full-capacity output • Why? 1) Say’s Law (supply creates its own demand) + 2) responsive, flexible prices + wages • AS doesn’t change in response to price changes: real profits and output unchanged

  3. Stable AD • Purchasable real output depends on: 1) Qm households + firms, 2) purchasing power of money Fixed money supply inverse relation price level + real output • Location AD: stable w/fixed M (if Q fixed, M up demand-pull; M down deflation) • Key to PL stability: control M

  4. No U • Fall M + AD ≠ U • Yes, excess supply, but downward flexible product + resource prices decline price level until equilibrium

  5. Keynesians • Say’s stupid • Investment esp. unstable • No self-correction w/in reasonable time frame

  6. Macro Instability Causes • Mainstream: 1) changes I; 2) AS shocks • Monetarism (neoclassical): 1) focus M, 2) markets highly competitive, 3) competition economic stability if not for gov’t interference • Downward price inflexibility: min wage laws, pro-union laws, farm subsidies, monopolies, etc. • Bad monetary policy

  7. Equation of Exchange • MV=PY • Money, Velocity, Price level, Yutput = Nominal GDP • Stable Velocity: 1) not constant, but gradual and predictable, 2) V changes w/ nominal GDP not M • ∆M disequilibrium try to “spend down” excess (replace cash w/other items) AD up nominal GDP up

  8. Monetary Causes Instability • Greenspan’s a hack • Mainstream: I • Monetarists: M, and GD is the proof • Policy? Want 3% growth? Announce M will grow 3%/year, et voila.

  9. Real-Business-Cycle View • Fluctuations from real factors: tech + resource availability affect productivity (output/worker) + long-run growth trend • p. 355 for explanation

  10. Coordination Failures • Fail to reach mutually beneficial equilibrium because lack joint coordination • Party in the rain? Get knifed in Berkeley hills/trash mom’s house in Moraga? • Unemployment or inflation equilibrium

  11. Self-Correct? • New Classical: divergence from f-e o internal mechanisms automatically move back (natural-rate theories) • Long-run adjustment

  12. Speed of Adjustment • “In the long-run we’re all dead” • Adaptive expectations (monetarists) 2-3 years • Rational expectations (RET): anticipate before occur quick/instantaneous • 1) Rational people + adequate info beliefs about future economic outcomes accurately reflect likelihood of outcome (efficient market hypothesis) • 2) Product + resource markets highly competitive w/flexible prices AND new info quickly incorporated

  13. Unanticipated Price-Level Changes • RET accepts may briefly affect real output • Unanticipated change misperception about price signals (demand shift rather than inflation) change in output • But once realize mistake return to original output • Anticipated changes (G policy) has no effect on Q, only P

  14. Mainstream View of Self-Correction • RET major + sig. effect, but disagreement on downward flexibility: inflexible for long periods • Why?

  15. Efficiency Wages • Efficiency wage: minimize firm’s labor cost per unit of output • May be above market wage • 1) greater work effort • 2) lower supervision costs • 3) reduced turnover

  16. Insider-Outsider Relationship • Insiders: those who keep jobs in recession • Outsiders: those who don’t • Firms unwilling to replace insiders w/outsiders; outsiders unwilling to work below others’ wages

  17. Rules or Discretion? • Monetary rule: announce set increase in M • Balanced budget: crowding-out is bad • Defense of Discretionary • Discretionary Monetary Policy: V more rapidly changing than monetarists allow • Discretionary Fiscal: crowding-out no big deal in recessions, make-up for monetary weakness/slowness; real costs of deficits/budgets vs. perceived • In fact increased macro stability

More Related