This document provides an overview of macroeconomic concepts and the evolution of macroeconomic thought over time. It discusses:
1. The key issues in macroeconomics like inflation, unemployment, economic growth, and business cycles.
2. The development of different schools of thought like Keynesian economics, monetarism, supply-side economics, and new classical economics in response to economic conditions.
3. How the application of these different approaches impacted the economy and influenced changes in administration like Reagan, Bush, and Clinton.
How Recession Affects Economics, Individuals, Bussiness And Others?Emma Wood
There are two types of recessions. The first occurs when output falls significantly below the full employment level due to a decline in aggregate spending by consumers and investors, resulting in high unemployment. This type was seen in the Great Depression. The second type occurs when the economy's potential output falls, such as due to a minimum wage increase or decline in productivity, and the economy may still be fully employed but output declines. Recessions are explained by different schools of thought - Monetarists see declines in the money supply as a cause, while Keynesian economists emphasize reductions in total spending and rigid prices leading to lower output and recessions.
This document provides an overview of the history and evolution of macroeconomic thought. It discusses classical macroeconomics, the Keynesian revolution in response to the Great Depression, and subsequent challenges to and developments in Keynesian theory including monetarism, rational expectations, and real business cycle theory. Modern macroeconomics incorporates elements of different schools of thought with an emphasis on the role of both aggregate demand and supply factors.
1) The document discusses the causes and effects of economic crises throughout history, focusing on crises in the Ottoman Empire and the most recent global financial crisis.
2) Some of the causes of crises discussed include increased population pressure, changes in bureaucratic structure, excessive taxation, war, and the bursting of housing bubbles fueled by low interest rates.
3) The effects of crises mentioned include falling national output, rising unemployment, business bankruptcies, and declining household wealth and consumption. Developed countries seemed to be affected more severely by the recent crisis.
This document provides an introduction to macroeconomics. It defines macroeconomics, discusses key questions in the field, and outlines different schools of thought regarding the appropriate role of government intervention in the economy. The document also summarizes different economic goals and debates around activist versus non-activist policy approaches.
The document discusses different macroeconomic theories including:
- Classical economists believed in full employment and laissez-faire markets.
- Keynesians believe active government policy is needed to stabilize the economy due to unstable aggregate demand and downwardly inflexible prices and wages.
- Monetarists like Milton Friedman advocated for a monetary rule where the money supply increases 3-5% annually. They believe velocity is stable.
- New Keynesians see the economy as potentially unstable due to changes in investment and supply shocks. They support monetary policy targeting interest rates in the short-run and money supply in the long-run.
John Maynard Keynes was a British economist born in 1883 in Cambridge, England. He attended Cambridge University where he studied mathematics and befriended members of the Bloomsbury Group. After graduating, Keynes held several government positions before returning to Cambridge. In the 1930s, Keynes published his seminal work "The General Theory of Employment, Interest and Money" which laid the foundations for modern macroeconomics and advocated for governments to spend money and implement fiscal policy to stimulate the economy during downturns. Keynes played a key role in the Bretton Woods institutions and helped establish the International Monetary Fund and World Bank, dying in 1946.
The document compares the monetary and Keynesian approaches to economic stability. The monetary (or monetarist) approach is based on the role of money in stabilizing aggregate demand, and believes that limiting government intervention and controlling the money supply are key. The Keynesian approach focuses on the role of government spending in stabilizing aggregate demand, and does not restrict government intervention. It believes fiscal policy tools like tax rates and government spending are most important for achieving economic stability, especially during downturns when suggested solutions include increasing various types of spending.
This document provides an overview of classical economics and compares it to modern/Keynesian economics. Some key points:
- Classical economics is based on flexible prices and wages, and the belief that savings will automatically equal investment through Say's Law. It sees the economy as self-regulating in the long run.
- Modern/Keynesian economics, developed by John Maynard Keynes, recognizes situations where savings and investment are not equal in the short run. It advocates for government intervention through spending and policies to stimulate demand and pull the economy out of slumps.
- Compared to classical economics which sees little role for government spending, Keynesian economics relies on government spending as a key part of
RESEARCH - The Fairfax Monitor - Edition 2Stephen Martin
The document discusses whether the current economic environment is more likely to lead to inflation or deflation. It analyzes factors influencing the debate such as declining asset prices, falling consumer demand, and aggressive monetary stimulus by central banks. While central banks have taken inflationary actions, the document concludes deflation remains the greater threat due to continued weakness in the banking system, low consumer spending, and lack of signs of rising inflation. The environment favors bonds over stocks and commodities in the near term until the banking system shows more stability.
There is now broad consensus among macroeconomists on key issues:
1) Monetary policy can be used to reduce economic instability by shifting the aggregate demand curve, except in a liquidity trap.
2) Fiscal and monetary policy can limit but not reduce unemployment below the natural rate.
3) Discretionary fiscal policy should be used sparingly due to lags and risk of political business cycles, while monetary policy plays the main stabilization role.
This document provides a group assignment report on hyperinflation submitted to a professor at NMIMS University. It contains definitions of hyperinflation, warning signs, causes such as excessive money supply growth and supply shocks, models like the crisis of confidence model and monetary model, units of measurement for inflation, costs of hyperinflation, examples of severe historical hyperinflations in Germany, Zimbabwe and Hungary, latest updates on Venezuela, surviving the aftermath, and conclusions. It examines hyperinflation from economic, historical and practical perspectives.
This document discusses several topics related to inflation and unemployment:
1. It defines inflation and the Phillips curve relationship between inflation and unemployment.
2. It outlines the two main causes of inflation: demand-pull inflation from increased aggregate demand, and cost-push inflation from increased costs of production.
3. It discusses the costs of inflation, stagflation, and Okun's law relating unemployment and GDP loss.
The document provides an overview and comparison of Keynesian and Austrian business cycle theories. It discusses their differing views on the causes of economic fluctuations and appropriate policy responses. Keynesians advocate government intervention through fiscal and monetary policy, while Austrians argue this distorts interest rates and causes malinvestments. Both theories have been criticized by economists, and there is no consensus on which provides the best framework.
Keynesian economics is an economic theory developed by John Maynard Keynes that argues that government intervention is necessary to increase aggregate demand and pull the economy out of recession. It posits that private sector spending affects income and output, and that inadequate private spending during economic downturns can lead to increased unemployment and a slower economy unless the government injects money directly into the economy through spending on public projects, tax cuts, or by increasing the money supply. Keynesian economics advocates for government intervention in the economy through fiscal policy tools like spending and taxation to stabilize output and mitigate economic cycles.
Inflation refers to a general increase in the prices of goods and services in an economy over time, which reduces the purchasing power of currency. While some inflation is necessary for economic growth, high or unpredictable inflation can be harmful. Negative effects of inflation include cost-push inflation which fuels a wage-price spiral, hoarding of goods, social unrest, and in extreme cases hyperinflation where a currency is abandoned. However, moderate and stable inflation provides benefits like allowing labor markets to adjust more quickly and giving central banks tools to stimulate the economy through interest rate changes.
1) Zimbabwe experienced hyperinflation from 1998-2008, with inflation reaching 66,200% by 2007, the second highest recorded rate in history.
2) The hyperinflation was caused by the central bank excessively printing money and lending it to state-owned enterprises and private entities, effectively hiding the large fiscal deficit.
3) Some groups, like those with connections to state enterprises, benefited from arbitraging the dual exchange rates, but most Zimbabweans suffered from the hyperinflation.
The document summarizes the business cycle, which describes the typical fluctuations in economic activity between periods of growth (prosperity) and contraction (recession/depression). It discusses how the business cycle affected Canada's economy in the 1920s-1940s, including a period of post-WWI prosperity, followed by recession after the 1929 stock market crash, a long depression in the 1930s with high unemployment, and eventual recovery aided by increased production during WWII. The cycles influenced other countries through economic interdependence and have led to modern policies like unemployment insurance.
Global Investment Returns Yearbook 2012Credit Suisse
This document examines how inflation and deflation have impacted different assets over time. It finds:
1) Throughout history, there have been periods of both inflation and deflation, though sustained high inflation is a 20th century phenomenon. Most countries have experienced both inflation and deflation at some point in the last 112 years.
2) While equities may offer some protection against inflation, they are influenced more by other sources of volatility. Bonds have played a special role as a hedge against deflation.
3) Real estate has been a disappointing inflation hedge, performing worse than domestic housing. Inflation-hedging strategies are also unreliable when applied to new time periods and locations.
This document discusses various aspects of inflation including definitions, causes, types, and models. It defines inflation as a persistent rise in general price levels in an economy over time which decreases the purchasing power of currency. Inflation can be caused by factors that increase aggregate demand (demand-pull) or costs of production (cost-push). The document outlines different schools of economic thought on inflation and various inflation measurement models and rates including the Phillips curve analysis of inflation and unemployment relationship. It also defines different types of inflation such as creeping, walking, running, galloping, and hyper inflation based on speed of price increases.
This document discusses how asymmetric economic shocks that affect some parts of an economy more than others can create problems for policymakers trying to set macroeconomic policies. It gives the example of how some economies may be dependent on oil prices, so a drop in oil prices would help them but could hurt other parts of the economy. This is a constant problem for those setting interest rates for the eurozone given the differences among eurozone economies and their potential exposures to different shocks.
The Great Depression - Presentation (Macroeconomics Perspective)Arjun Parekh
The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, originating in the United States. The document discusses several key causes and events of the Great Depression including the stock market crash of 1929, a decline in the money supply, policy decisions like the Smoot-Hawley Tariff Act of 1930, and the effects of abandoning the gold standard. John Maynard Keynes advocated for policies like deficit spending to stimulate the economy in response to the Depression. Roosevelt's New Deal programs attempted to address unemployment and stabilize the banking system through acts like the National Industrial Recovery Act.
The Great Depression was a severe worldwide economic depression that began in the United States in 1929 and lasted until the late 1930s into early 1940s. It originated from the collapse of stock prices and was exacerbated by monetary contraction and protectionist trade policies. Global GDP fell by around 15% between 1929-1932. Unemployment rose dramatically in many nations, including reaching 25% in the US. The Depression had devastating social and economic effects globally and led to political instability in several countries. Most countries began recovering around 1933, though the world did not fully recover until massive government spending during World War II.
Macroeconomics is the study of the economy as a whole, examining aggregates such as national income, output, employment and price levels. It analyzes how these aggregates interact and how policies affect their behavior. Macroeconomics emerged as a separate field due to the failure of classical economics to explain the Great Depression. John Maynard Keynes developed theories emphasizing aggregate demand and the role of government in managing the economy. Later schools include monetarism, supply-side economics and new classical macroeconomics, debating the factors driving output and inflation.
Ryan Avent writes that this year's best business books on economics all look back, with various degrees of pessimism on the construction of the post-World War II order, and on its demise. Marc Levinson's An Extraordinary Time chronicles the remarkable growth of the period between 1945 and 1973 -- and suggests the problems that have cropped up in the past 40 years represent a reversion to the mean. Rick Wartzman's The End of Loyalty tracks the breakdown of the social contract between employers and employees through the lens of four major U.S. industrial companies. And Walter Scheidel's The Great Leveler argues that the inequality that characterizes our own time has been present in societies since the beginning of recorded history.
This document provides an overview of macroeconomics, including its origins, development, and current state. It discusses what macroeconomics is and the key factors it analyzes like GDP, unemployment, inflation. It reviews the major schools of thought in macroeconomics including classical economists, Keynesians, monetarists, and new classical economists. It details the key ideas from each school. It also discusses the origins of macroeconomics in the Great Depression and John Maynard Keynes' work developing theories to explain short-run economic fluctuations.
The document provides historical context and explanations for the Great Depression. It begins by describing the stock market crash of 1929 and defines depression. It then discusses the economic prosperity of the 1920s, known as the Roaring Twenties. The advent of the Great Depression is explained as having begun in the 1920s due to an uneven distribution of wealth and overproduction. The document lists the key causes of the Great Depression and analyzes the Classical and Keynesian economic models used to explain it, noting the flaws in assuming full employment.
Core Macroeconomic Concepts in Historical ContextAsad Zaman
This document summarizes a lecture on the history and development of macroeconomic theories. It discusses how theories like Keynesian economics were developed in response to economic crises like the Great Depression. It outlines the rise of deregulation and supply-side economics in the late 20th century in response to stagflation. It also discusses ongoing debates between different schools of macroeconomic thought and criticisms of policies like privatization and financialization.
This document discusses the business cycle and its effects. It begins with an introduction to business cycles, which are periodic fluctuations in economic activity. It then discusses the impacts of business cycles on employment, consumption, business confidence, and other macroeconomic variables. The document also provides examples of impacts from specific business cycles, such as the impact of the 2001 recession in the US. It analyzes unemployment, job losses, poverty levels, and other economic indicators from that time. Finally, the document argues that the 2001 recession may have been avoided through more proactive fiscal policy interventions.
This document discusses sustainable economic systems and provides context around stability and sustainability. It covers several key topics:
1. It discusses the need for more stability in economic systems to avoid large swings and volatility, as well as the importance of sustainability and responsible use of resources.
2. It analyzes different approaches to economic growth, including "roll-over growth" which can create instability, approaches that focus on continuing growth through technology, and those that advocate for amended growth metrics beyond just GDP.
3. It also discusses the failure of convergence between economic models and the need for pluralism, examining different varieties of capitalism systems and arguments against a one-size-fits-all model.
This document summarizes and compares the economic theories of John Maynard Keynes and Friedrich Hayek. Keynes believed that government intervention was needed to stimulate demand and restore growth during economic downturns. Hayek viewed the market as self-correcting through competitive forces and saw government intervention as causing more instability. While they disagreed on monetary policy, they shared ideas about what constitutes a civilized society and skepticism of economists claiming to know with certainty. The document also provides background on Keynes and Hayek's influential careers and contributions to economics.
Similar to The power of macroeconomics part 1 (11)
This document discusses various measures for evaluating forecast accuracy, including mean error, mean absolute percent error, and mean squared error. It explains that mean error measures bias while mean absolute percent error and mean squared error measure accuracy. Mean squared error gives more weight to large errors, which are most important to avoid. The document also covers moving averages, which average a subset of historical data to smooth out fluctuations and forecast future values. It notes the moving average period N is a key parameter, with smaller N producing more reactive forecasts and larger N producing more stable forecasts.
The document discusses two simple forecasting methods: the naive forecast and the cumulative mean.
The naive forecast assumes that demand from the previous time period will be the same for the current time period. It is a simple approach but can be noisy as it does not filter out any variations in demand.
The cumulative mean averages demand across all previous time periods to generate the forecast. It filters out noise but may not recognize patterns as it assumes all historical data is equally useful. Both simple methods have limitations but can serve as benchmarks for more complex forecasting techniques.
This document discusses reduced adverb clauses, which are shortened adverb clauses that function like adverbs. Reduced adverb clauses simplify sentences by omitting the subject and changing the verb to the -ing form. There are three types of adverb clauses that can be reduced: those beginning with while, since, before; those expressing cause or contrast with because, as; and those in the past tense with had. Examples are provided to illustrate how to properly reduce different types of adverb clauses.
This document discusses focal lengths and how they impact the appearance of subjects in photographs. Longer focal lengths result in a more telephoto or zoomed-in look where subjects appear larger at the focal plane, while shorter focal lengths have a wide-angle effect making subjects look smaller. The normal focal length for a camera is determined by measuring the diagonal size of the image sensor, and smaller sensors like APS-C will result in a more telephoto focal length than a full-frame sensor of the same focal length specification.
The document discusses different types of clauses including independent clauses, dependent clauses, and adverb clauses. It provides examples of each clause type and how they are used in sentences. Adverb clauses can be used at the beginning, middle, or end of a sentence and require certain punctuation. The document also discusses using transition words like whereas, while, and although when connecting clauses.
This document discusses various transitions words that can be used to connect ideas and show relationships between different parts of writing. It provides examples of transitions words like "in addition", "however", "therefore", "afterward", "similarly", "in fact", and discusses how they can be used to show additional information, contrasting ideas, results, time order, comparisons, and emphasis. It also discusses punctuation placement of transitions and using prepositional phrases and words like "despite" and "similar" to show unexpected results and similarities.
This document discusses different types of conjunctions and how they are used to connect clauses and show relationships. It provides examples of the seven coordinating conjunctions - and, but, or, yet, so, for, nor. Compound sentences are formed when two independent clauses are joined by a coordinating conjunction. Correlative conjunctions like both-and, not only-but also, either-or, neither-nor must always appear together and affect subject-verb agreement.
There are seven coordinating conjunctions: and, but, for, nor, or, yet, and so. Each conjunction connects two independent clauses and shows a certain relationship between them, such as addition, contrast, cause and effect, or alternatives. When using a coordinating conjunction, a comma is placed before the conjunction. Connecting two independent clauses with a conjunction forms a compound sentence. Examples of sentences using each conjunction are provided to demonstrate their meanings and proper uses.
This document discusses the present perfect tense and its uses. It explains that the present perfect tense is formed using have/has plus the past participle. It then lists the uses of the present perfect tense, including uses with since and for, yes/no questions, wh- questions, and frequently used adverbs like ever, never, yet and already. Examples are provided to illustrate questions and answers using the present perfect tense. Additional reference information is given at the end.
This document discusses the proper use of verb tenses in future time clauses and mixed tenses. It provides examples of using the present tense, not future tense, in clauses introduced by time words like "when." Additionally, it discusses mixing tenses across clauses, such as using the present tense to talk about a future event and the future tense for the main clause. The document is intended to teach verb tense rules and provide references for further information.
The document discusses verb tenses and passives. It covers making guesses about the past using modal verbs, expressing regret about the past using modal verbs, and using passive verbs. When using passive verbs, an action can only be changed to passive voice if the verb is transitive and has an object. There are three reasons to use the passive voice: when you don't want to name who did the action, to change the focus from the person to something else, and when the person who did the action is unknown.
This document discusses various verb tenses and the progressive form. It provides examples and explanations of the present perfect progressive, past perfect progressive, and future perfect progressive tenses. The key uses of each tense are outlined, including expressing duration of an ongoing activity, a recent habit, or an activity that ended. Examples demonstrate when to use progressive and non-progressive forms depending on whether the verb denotes a continuous or non-continuous action.
This document discusses verb tenses and passives. It provides examples of how to form and use the present tense, present progressive tense, and simple past tense. It explains that the present tense is used to talk about facts or habits while the present progressive tense is used for activities happening now. Examples are given to illustrate forming yes/no and wh- questions in the simple present tense. The document also discusses using the present progressive tense with the verbs "be" and a main verb ending in "-ing." It provides examples comparing the simple present and present progressive tenses. Finally, it briefly mentions the past perfect and future perfect tenses but focuses primarily on the present and past tenses.
This document provides guidance on writing introductions, body paragraphs, and conclusions for essays. It discusses using hooks like surprising facts, anecdotes, questions, or quotes to open introductions. The introduction should get more specific using a "funnel" structure until reaching the thesis statement, which contains the topic and controlling idea. Body paragraphs should each focus on proving part of the thesis with facts and explanations. The conclusion should summarize main points without introducing new information and leave the reader with final thoughts.
This document discusses verb tenses and passives. It provides examples of how to form and use the present tense, present progressive tense, and simple past tense. It explains that the present tense is used to talk about facts or habits while the present progressive tense is used for activities in progress now. Examples are given to illustrate forming yes/no and wh- questions in the simple present tense. The document also discusses how to form the present progressive tense using a form of "to be" plus the verb with "-ing." Future and past perfect tenses are briefly mentioned but no examples are given.
This document discusses competitive positioning and generic competitive strategies. It begins by explaining that competitive positioning lies at the intersection of a firm's capabilities and market opportunities, aligned with its mission and values. It then describes Michael Porter's four generic competitive strategies based on cost leadership and differentiation. Low cost and differentiation strategies position firms differently along these dimensions. The document also provides an example of using a strategy map to plot competitors in an industry based on factors like average vehicle cost and sportiness to illustrate different generic positions.
This document discusses analyzing firm capabilities through a capabilities analysis. It covers identifying a firm's distinctive capabilities, assessing internal and external alignment of capabilities, and determining the sustainability of competitive advantages provided by capabilities. Key points include identifying capabilities using a value chain analysis, unpacking capabilities into underlying resources like people and processes, ensuring internal alignment of capabilities, and creating barriers to imitation to sustain advantages like legal protections or unique historical development.
This document discusses factors that influence the threat of entry in an industry. It explains that incumbent firms want the threat of entry to be low as it impacts profitability potential. High sunk costs, intellectual property advantages, economies of scale, and learning curves can make entry more difficult by giving incumbents a cost advantage over potential new entrants. Industries with high minimum efficient scales, switching costs, or network effects tend to have lower threats of entry. The document uses examples from the airline and semiconductor industries to illustrate these concepts.
This document provides information on nouns and quantifiers in English grammar. It discusses countable and uncountable nouns, rules for plural forms, irregular plurals, and uses of articles like a, an, the with different types of nouns. It also explains quantifiers that can be used with both countable and uncountable nouns like some, any, enough, most, plenty. Examples are given to illustrate the rules and common mistakes are highlighted. The purpose is to help learners understand and properly use nouns and quantifiers in English.
The document discusses key factors to consider for an efficient supply chain logistics network:
1. Use as few warehouses as possible that are close to the largest number of customers to reduce costs. The number and location of warehouses impacts inventory levels and transportation.
2. Keep miles-per-delivery (MPD) for each warehouse as low as possible, with a maximum of 1,000 miles for the farthest customer and an average MPD of 300-400 miles.
3. Find a balance that makes sense for your specific needs and requirements, with a conservative approach to avoid overspending or critical mistakes.
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1. The Power of Macroeconomics:
Economic Principles in the Real
World- part 1
MCENROE NG
2. Macroeconomics defined
Micro- large
Big economic pocture
MICRO- dea;s with individual markets, business, comsumers, investor and workers
that make up of the economy
3. The Big Four Macroeconomic Issues
1. Inflation
2. Unemployment
3. Rate of economic growth
4. Forecasting movements in business
cycle
9. Three kinds of unemployment
Frictional
Cyclical
Structural
29. Aggregate supply and aggregate demand
The AS-AD model has its roots in classical economics and is represented in this figure.
The vertical axis measures the general price level for all goods and services And the horizontal
axis measures the level of real gdp.
The curve labeled AS represents the economy's aggregate supply, or how much out put the
economy will produce at different price levels.
Note that it slopes upwards meaning that the higher the price level the more that businesses will
produce.
The downward sloping AD curve is the aggregate demand curve. It represents what everyone in
the economy, consumers, businesses,foreigners and government, would buy at different
aggregate price levels
Downwards slope means that as the general price level is falls consumers and businesses will
increase their demand for goods and services.
30. Aggregate supply and aggregate demand
Where the AS And AD curves cross, at point e, we have a macro economic
equilibrium.
A macroeconomic equilibrium is a combination
of overall price and quantity at
which neither buyers nor sellers wish to change their purchases, sales, or prices.
For example, at a price
level of P equals 200, the economy is out of equilibrium
32. The Major Schools of Macroeconomics
To begin our macroeconomic history, it dates back to the late 1700s and has its
roots in the laissez faire writings of free market economists like Adam Smith,
David Ricardo and, most importantly, Jean-Baptiste Say.
These classical economists believed that the problem of unemployment was a
1. natural part of the business cycle,
2. that it was self-correcting and,
3. most important, that there was no need for the government to intervene in the
free market to correct it.
33. The Major Schools of Macroeconomics
Between the Civil War and the Roaring 20s, America sustained periodic booms
and busts, recording no less than five official depressions.
However, after every bust, the economy always bounced back exactly as the
classical economists predicted.
That was true until these classical economists met their match in the Great
Depression of the 1930s.
With the stock market crash of 1929, the economy fell into, first to recession, and
then a deep depression.
The gross domestic product fell by almost a third andby 1933, 25% of the work
force was unemployed.
34. The Major Schools of Macroeconomics
The same time, business investment virtually disappeared, from about $16 billion in
1929 to $1 billion by 1933.
While President Herbert Hoover kept promising that prosperity was just around the
corner, and the classical economists kept waiting for what they viewed as the inevitable
recovery, two key figures walked onto the macroeconomic stage.
Economist John Maynard Keynes and
Hoover's presidential successor Franklin Delano Roosevelt.
John Maynard Keynes flatly rejected the classical notation of a self-correcting
economy and warned that patiently waiting for the eventual recovery was fruitless
because in the long run, we're all dead.
35. The Major Schools of Macroeconomics
Keynes believed that under certain circumstances the economy would not
naturally rebound, but simply stagnate or even worse, fall into a death spiral.
To Keynes, the only way to get the economy moving again was to prime the
economic pump with increased government expenditures.
Thus, the fiscal policy was born and the Keynesian prescription became the
underlying, if unstated, philosophy of Franklin Delano Roosevelt's New Deal.
36. The Major Schools of Macroeconomics
Roosevelt's ambitious public works programs in the 1930s, together with the
1940s boom of World War II, were enough to lift the American economy out of
the Great Depression and up to unparalleled heights. In the early1950s, the
Keynesian prescription of large-scale government expenditures worked again.
This time, when the heavy spending associated with the Korean War helped
pull the economy out of a slump. A decade later, pure Keynesianism reached its
zenith with the much heralded Kennedy tax cut of 1964.
In President John F Kennedy's Camelot, the Chairman of Economic
Advisors, Walter Heller popularized the term fine tuning.
37. The Major Schools of Macroeconomics
And Heller firmly believed that through the careful, mechanistic application of
Keynesian principles the nation’s macroeconomy could be held very close to full
employment with minimal inflation
In 1962, Heller recommended to Kennedy that the president advocate a large tax
cut to stimulate the sluggish economy.
The Congress eventually agreed and his Keynesian tax cut helped make the 1960s
one of the most prosperous decades in America.
38. The Major Schools of Macroeconomics
However, this fiscal stimulus also laid the foundation for the emergence of a new
and ugly macroeconomic phenomenon known as stagflation.
Simultaneous high inflation and high unemployment.
The stagflation problem had its roots in President Lyndon Johnson's
stubbornness.
In the late 1960s, against the strong advice of his economic advisors, Johnson
increased expenditures on the Vietnam War, but refused to cut spending on his
Great Society social welfare programs. This refusal helped spawn a virulent
demand pull inflation.
39. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
The essence of demand-pull inflation is, too much money chasing too few
goods.
And that is exactly what happened when the US tried to finance both guns and
butter, both the Vietnam War and the Great Society.
41. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
This situation is illustrated in this figure. During war time, increased defense
spending moved aggregate demand from AD to AD', and equilibrium output
increases from E to E' as real GDP expands.
However, when real output rises far above potential output the price level moves
up sharply as well, from P to P'.
1972, President Richard Nixon imposed price and wage controls, and gained the
nation a brief respite from the Johnson-era inflation.
However, once the controls were lifted in 1973, inflation jumped back up
to double digits, helped in large part by a different kind of inflation then
emerging, an inflation known as cost-push, or supply-side inflation.
42. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
Cost-push, or supply-side inflation occurs when factors such as rapid increases
in raw material prices or wage increases drive up production costs.
This can happen as a result of so-called supply shocks, such as those experienced
in the early 1970s.
During this period, such shocks included crop failures, a worldwide drought, and
a quadrupling of the world price of crude oil.
44. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
This cost-push situation in the 1970s is illustrated in this figure.
Sharply higher oil, commodity, and labor costs increased the cost of doing
business.
In the AS-AD framework, the higher costs shift the AS curve up from AS to AS',
and the equilibrium shifts from E to E'.
Output declines from Q to Q', while prices rise.
This leads to the phenomenon of stagflation, recession or stagnation combined
with inflation.
In this situation, the economy suffers the double whammy of both lower output
and higher prices
45. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
Prior to the 1970s, economists didn't believe you could even have both high
inflation and high unemployment at the same time.
If one went up, the other had to go down.
The 1970s proved economists wrong on this point, and likewise exposed
Keynesian economics as being incapable of solving the new stagnation problem.
46. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
The Keynesian dilemma was simply this. Using expansionary policies to reduce
unemployment simply created more inflation, while using contractionary policies
to curb inflation only deepened the recession. That meant that the traditional
Keynesian tools could solve only half of the stagflation problem at any one time,
and only by making the other half worse.
It was this inability of Keynesian economics to cope with stagflation that set for
the stage for Professor Milton Friedman's monetarist challenge to what had
become the Keynesian orthodoxy. Milton Friedman's monetarist school argued
that the problems of both inflation and recession may be traced to one thing, rate
of growth of the money supply.
47. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
To the monetarists, inflation happens when the government prints too much
money, and recessions happen when it prints too little.
From this monetarist perspective, stagflation is the inevitable result of activist
fiscal and monetary policies that try to push this economy
beyond its so called natural rate of unemployment, or more technically, its lowest
sustainable unemployment rate.
48. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
This natural rate of unemployment, or LSUR, is the lowest level of unemployment
that can be attained without upward pressure on inflation.
According to the monetarists, expansionary attempts to go beyond this lowest
sustainable unemployment rate may result in short-run spurts of growth.
However, after each growth spurt, prices and wages rise, and drag the economy
back to its LSUR, albeit at a higher rate of inflation.
49. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
Over time, these futile attempts to push the economy beyond its lowest
sustainable unemployment rate lead to an upward inflationary spiral.
In this situation, monetarists believe that they only way to wring inflation
and inflationary expectations out of the economy is to have the actual
unemployment rate rise above the LSUR, and that means only one thing.
Inducing a recession.
This is at least one interpretation of what the Federal Reserve did beginning in
1979 under the monetarist banner of setting monetary growth targets.
50. Demand-Pull Inflation Versus Cost-Push
Inflation, The Keynesian Dilemma & Rise
of Monetarism
Under Chairman Paul Volcker, the Fed adopted a sharply contractionary monetary
policy, and interest rates soared over 20 percent. Particularly hard hit were
interest-sensitive sectors of the economy like housing construction, automobile
purchases, and business investment.
While the Fed's bitter medicine worked, three years of hard economic times left a
bitter taste in the mouths of the American people. Now hungry for a sweeter
macroeconomic cure than either the Keynesians or monetarists could offer, enter
stage right, supply-side economics.
52. From Supply Side Economics and The
New Classicals Back to Keynesianism
In the 1980 presidential election, Ronald Reagan ran on a supply-side platform
that promised to simultaneously cut taxes, increase government tax revenues and
accelerate the rate of economic growth. Without inducing inflation, a very sweet
macro-economic cure indeed.
On the surface, the supply side approach looks very similar to the kind of
Keynesian tax cut prescribed in the 1960s to stimulate a sluggish economy.
However, the supply siders viewed such tax cuts from a very different behavioural
perspective.
53. From Supply Side Economics and The
New Classicals Back to Keynesianism
Unlike the Keynesians, they did not agree that such a tax cut would necessarily
cause inflation. Instead, the supply siders believed that the American people
would actually work much harder and invest much more if they were allowed to
keep more of the fruits of their labour.
The end result would be to increase the amount of goods and services our
economy could actually produce by pushing out the economy's supply curve.
Hence, supply-side economics.
54. From Supply Side Economics and The
New Classicals Back to Keynesianism
Most important the supply siders promised that by cutting taxes, and thereby
spurring rapid growth, a loss in tax revenue from the tax cut would be more than
offset by the increase in tax revenues from increased economic growth.
Thus, under supply side economics, the budget deficit would actually be reduced.
Unfortunately, that didn't happen. While the economy boomed, so too did
America's budget deficit. And as the budget deficit soared, America's trade deficit
soared with it.
The so called twin deficits deeply concerned Reagan's successor George Bush
particularly after the budget deficit jumped over $ 200 billion at the midpoint of
his term in 1990 and the economy began to slide into recession.
55. From Supply Side Economics and The
New Classicals Back to Keynesianism
To any red blooded Keynesian, this onset of recession would have been a clear
signal to engage in expansionary policy. However, in the Bush White House,
Ronald Reagan supply side advisors had been suplanted, not by Keynesians but
rather, by a new breed of macroeconomic thinkers. The so called, New Classicals.
New Classical economics is based on the controversial theory of rational
expectations. This theory says that if you form your expectations rationally, you
will take into account all available information, including the future effects of
activist fiscal and monetary policies. The idea behind rational expectations is that
such activist policies might be able to fool people for a while.
56. From Supply Side Economics and The
New Classicals Back to Keynesianism
However, after a while people will learn from their experiences and then you can't fool
them at all.
Central policy implication of this idea is of course profound. Rational expectations
render activist fiscal and monetary policies completely ineffective, so this should be
abandoned.
We'll talk more about whether this theory is good economics or not the later lesson,
but it was clearly bad politics, at least for President Bush. Indeed, Bush's new classical
advisors flatly rejected any Keynsesian quick fix to the deepening recession.
Instead they called for more stable and systematic policies based on long term goals,
rather than a continued reliance on short sided discretionary reactions.
57. From Supply Side Economics and The
New Classicals Back to Keynesianism
Bush took this new classical advice. The economy limped into the 1992
presidential election, and like Richard Nixon in 1960, Bush lost to a Democrat
promising to get the economy moving again.
What is perhaps most interesting about this transition of power is that Bill Clinton
actually did very little to stimulate the economy.
The mere fact however, that Clinton promised a more activist approach helped
restore business and consumer confidence.
58. From Supply Side Economics and The
New Classicals Back to Keynesianism
The same time congressional passage of Clinton's deficit reduction legislation in 1993
sent Wall Street a clear signal that his administration was serious about budget
balance.
Together these factors helped accelerate a recovery that had already begun by the end
of Bush's term. These factors also set the stage for Clinton's remarkably easy re-
election in 1996, as well as the longest economic recovery in peace-time history.
The next decade would not however, be anywhere near as kind or prosperous as the
1990s. Shortly after George Walker Bush took office in 2001, the US economy would
fall into recession while by years end, America would be hit by a 9/11 terrorist attack
that would catapult the country into two expensive wars in Iraq and Afghanistan.
59. From Supply Side Economics and The
New Classicals Back to Keynesianism
In that same year of 2001, China joined the World Trade Organization and began
flooding America with illegally subsidized exports. Over the next ten years, the US
would shutdown over 50,000 factories, lose more than $5 million manufacturing
jobs and see it's historical annual rate of GDP growth cut by a full 2 3rds.