Professional Documents
Culture Documents
Real GDP is
determined
by aggregate
supply
The price
level is
determined
by aggregate
demand.
4
Keynesian Economics: Economic Activism
John Maynard Keynes, The General Theory of
Employment, Interest, and Money (1936)
Emphasizes aggregate demand in determining
GDP and employment.
Assumes fixed prices (horizontal AS) at relevant
levels of GDP.
inflation is not a risk when unemployment is
high.
Government must stabilize an inherently
unstable macroeconomy
Use demand management policies
Fiscal policy
Monetary policy 5
The Fixed-Price Keynesian Model
6
Monetarism: Return to Laissez - Faire
Milton Friedman, Studies in the Quantity Theory of Money (1956)
_______________, The Role of Monetary Policy (1968)
7
Monetarism: Return to Laissez-Faire
13
New Classical Economics
14
New Keynesians: Policy Can Work
Incorporate rational expectations
But prices and wages are sticky in short run.
Disequilibrium prevails.
Price-wage stickiness: impediments to
adjustment exist (contracts, adjustment costs,
etc.)
Activist policies can work
Stabilize the economy/make things better!
The private sector is an important source of
shifts in aggregate demand.
Monetary and fiscal policies should be used to
offset drops in private sector spending.
15
The Modern
Keynesian
Model
16