Embed Size (px)
Citation preview
The Roots of ModernThe Roots of ModernMacroeconomicsMacroeconomics
The Roots of Modern MacroeconomicsThe Roots of Modern Macroeconomics
Setting the Scene: Three Key Issues
Setting the Scene: Three Key Issues
THREE KEY ISSUESTHREE 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
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)Different aggregate supply curves: (a)
O
AS
Pric
e le
vel
National output
Y
O
P1
Pric
e le
vel
National output
AD1
Y
AS
Different aggregate supply curves: (a)Different aggregate supply curves: (a)
O
P1
Pric
e le
vel
National output
AD2
P2
Y
AS
AD1
Different aggregate supply curves: (a)Different aggregate supply curves: (a)
THREE KEY ISSUESTHREE 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
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
Different aggregate supply curves: (b)Different aggregate supply curves: (b)
O
ASPric
e le
vel
National output
P
O
ASPric
e le
vel
National output
Y1
P
AD1
Different aggregate supply curves: (b)Different aggregate supply curves: (b)
O
AS
Y1
Pric
e le
vel
National output
Y2
P
AD2
AD1
Different aggregate supply curves: (b)Different aggregate supply curves: (b)
THREE KEY ISSUESTHREE 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
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)Different aggregate supply curves: (c)
O
Pric
e le
vel
National output
AS
O
AS
Pric
e le
vel
National output
Y1
P1
AD1
Different aggregate supply curves: (c)Different aggregate supply curves: (c)
O
AS
Y1
Pric
e le
vel
National output
Y2
P1
P2
AD2
AD1
Different aggregate supply curves: (c)Different aggregate supply curves: (c)
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
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
THREE KEY ISSUESTHREE KEY ISSUES
The Roots of Modern MacroeconomicsThe Roots of Modern Macroeconomics
Classical Macroeconomics
Classical Macroeconomics
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable funds
Classical analysis of output and employment markets clear
labour marketmarket for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
The market for loanable fundsThe market for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
r1
The market for loanable fundsThe market for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
r1
The market for loanable fundsThe market for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
r2
The market for loanable fundsThe market for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
r2
The market for loanable fundsThe market for loanable funds
O
Saving (supply)
Investment (demand)
Rat
e of
inte
rest
Quantity of loanable funds
re
The market for loanable fundsThe market for loanable funds
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
Classical analysis of prices and inflation
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
Classical analysis of prices and inflation
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
Classical analysis of prices and inflation the quantity theory of money
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket for imports and exports:
the gold standard Say’s law
Classical analysis of prices and inflation the quantity theory of money
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket 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 analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket 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 MACROECONOMICSCLASSICAL MACROECONOMICS
Classical analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket 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 analysis of output and employment markets clear
labour marketmarket for loanable fundsmarket 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 MACROECONOMICSCLASSICAL MACROECONOMICS
The Great Depression and the return to the gold standard the depression of the 1920s
The Great Depression and the return to the gold standard the depression of the 1920s
0
2
4
6
8
10
12
14
16
18
20
22
24
1919 1921 1923 1925 1927 1929 1931 1933 1935 1937
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
-25
-20
-15
-10
-5
0
5
10
15
Inflatio
n (%
)UK unemployment and inflation: 1919 38UK unemployment and inflation: 1919 38
Unemployment
0
2
4
6
8
10
12
14
16
18
20
22
24
1919 1921 1923 1925 1927 1929 1931 1933 1935 1937
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
-25
-20
-15
-10
-5
0
5
10
15
Inflatio
n (%
)
Unemployment
Inflation
UK unemployment and inflation: 1919 38UK unemployment and inflation: 1919 38
CLASSICAL MACROECONOMICSCLASSICAL MACROECONOMICS
The Great Depression and the return to the gold standard the depression of the 1920s
return to the gold standard
The Great Depression and the return to the gold standard the depression of the 1920s
return to the gold standard
CLASSICAL MACROECONOMICSCLASSICAL 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 Great Depression and the return to the gold standard the depression of the 1920s
return to the gold standard
effects on the economy
CLASSICAL MACROECONOMICSCLASSICAL 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
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 MACROECONOMICSCLASSICAL 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 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 MACROECONOMICSCLASSICAL 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 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 MACROECONOMICSCLASSICAL 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 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
AD2
AD1
O
AS
P1
Pric
e le
vel
National output
P2
Q1
The effect of printing extra money: the classical analysisThe effect of printing extra money: the classical analysis
The Roots of Modern MacroeconomicsThe Roots of Modern Macroeconomics
The Keynesian Revolution
The Keynesian Revolution
THE KEYNESIAN REVOLUTIONTHE KEYNESIAN REVOLUTION
Keynes’ rejection of classical theory rigidities in the labour market the problem of deficiency of demand
Keynes’ rejection of classical theory rigidities in the labour market the problem of deficiency of demand
O
ADL1
Rea
l wag
e ra
te (
W /
P)
Quantity of labour
W1
ADL2
ASL
The problem of demand deficiency in the labour marketThe problem of demand deficiency in the labour market
THE KEYNESIAN REVOLUTIONTHE 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
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
O
Savings 1
Investment
Rat
e of
inte
rest
Quantity of loanable funds
r1
Savings 2
r2
Disequilibrium in the market for loanable fundsDisequilibrium in the market for loanable funds
THE KEYNESIAN REVOLUTIONTHE 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
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 REVOLUTIONTHE 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’ 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 REVOLUTIONTHE 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
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 REVOLUTIONTHE 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
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
O
Pric
e le
vel
National output
YP
The effects of increases in aggregate demand on national outputThe effects of increases in aggregate demand on national output
AS
O Y1
Pric
e le
vel
National output
Y2
AS
Y3 Y4 YP
The effects of increases in aggregate demand on national outputThe effects of increases in aggregate demand on national output
AD3AD2AD1
AD4
THE KEYNESIAN REVOLUTIONTHE 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
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 incomeThe circular flow of income
Cd
The circular flow of incomeThe circular flow of income
CdIncomes
The circular flow of incomeThe circular flow of income
Cd
W = S + T + M
Incomes
The circular flow of incomeThe circular flow of income
Cd
W = S + T + M
J = I + G + X
Incomes
The circular flow of incomeThe circular flow of income
Cd
W = S + T + M
J = I + G + X
Incomes
The circular flow of incomeThe circular flow of income
Cd
W = S + T + M
J = I + G + X
Incomes
The circular flow of incomeThe circular flow of income
Cd
W = S + T + M
J = I + G + X
Incomes
The circular flow of incomeThe circular flow of income
THE KEYNESIAN REVOLUTIONTHE 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
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 Roots of Modern Macroeconomics
The Monetarist– Keynesian DebateThe Monetarist–
Keynesian Debate
THE MONETARIST–KEYNESIAN DEBATETHE 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
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
The monetarist version of the long-run Phillips curveThe monetarist version of the long-run Phillips curve
O
Unemployment
Infla
tion
(%)
Un
(a) Keynesian aggregate supply curve(a) Keynesian aggregate supply curve
O
Pric
e le
vel
National output
AS
YPYmax
(b) Keynesian Phillips curve(b) Keynesian Phillips curve
O
Unemployment
Infla
tion
(%)
Umin
THE MONETARIST–KEYNESIAN DEBATETHE 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 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 DEBATETHE 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 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
Modern-day Keynesians inflation unemployment structural problems hysteresis
low capital stockdeskilling insiders and outsiders
criticisms of monetarism Keynesian policy proposals
Modern-day Keynesians inflation unemployment structural problems hysteresis
low capital stockdeskilling insiders and outsiders
criticisms of monetarism Keynesian policy proposals
THE MONETARIST–KEYNESIAN DEBATETHE MONETARIST–KEYNESIAN DEBATE
The Roots of Modern MacroeconomicsThe Roots of Modern Macroeconomics
The Current PositionThe Current Position
THE CURRENT POSITIONTHE 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 range of views
new classical / rational expectations school
moderate monetarists
moderate Keynesians (new Keynesians)
extreme Keynesians
the radical left
eclectic economists
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
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
THE CURRENT POSITIONTHE CURRENT POSITION
