eco 200 – principles of macroeconomics chapter 16: alternative macroeconomic models
TRANSCRIPT
Eco 200 – Principles of Macroeconomics
Chapter 16: Alternative macroeconomic models
Alternative macroeconomic models Fixed-price Keynesian model New Keynesian model Monetarist model New classical model
Fixed-price Keynesian model Assumes a constant price level
Fixed-price Keynesian model Assumes a constant price level This model was popular during and
immediately after during the Great Depression little concern about inflation
Fixed-price Keynesian model
Policymakers’ role in the fixed-price Keynesian model private economy is inherently
unstable
Policymakers’ role in the fixed-price Keynesian model private economy is inherently
unstable advocates active role for
government in stabilizing the economy
New Keynesian model
Recognizes that the price level is not constant
New Keynesian model New Keynesians argue that prices
and wages are not flexible (especially in a downward direction) in the short run
New Keynesian model New Keynesians argue that prices
and wages are not flexible (especially in a downward direction) in the short run
Firms respond to a reduction in the demand for output by cutting production (and labor use), not prices (and wages)
Policymakers’ role in the New Keynesian model Essentially the same as for
traditional Keynesians (but with more attention paid to inflation)
Monetarist economics Money supply affects output and
the price level in the short run
Monetarist economics Money supply affects output and the
price level in the short run Economy is believed to be inherently
stable, with rapid self-adjustment.
Monetarist economics Money supply affects output and
the price level in the short run Economy is believed to be
inherently stable, with rapid self-adjustment.
Lags: recognition lag reaction lag effect lag
Policymakers’ role under monetarist economics Believe that discretionary policy is
inherently destabilizing due to long and variable lags
Policymakers’ role under monetarist economics Believe that discretionary policy is
inherently destabilizing due to long and variable lags
Prefer a reliance on fixed rules
New classical model
Classical model was the dominant macroeconomic theory until the Keynesian revolution
New classical model relies on rational expectations
New classical model relies on rational expectations wages and other resource prices
are assumed to respond immediately to any anticipated policy change
New classical model
Policymakers’ role under the new classical model discretionary policy is not effective
Policymakers’ role under the new classical model discretionary policy is not effective prefer the use of fixed rules (with
credible policy announcements)