AP Economics Mr. Bernstein Module 35: History and Alternative Views of Macroeconomics March 31, 2014
AP EconomicsMr. Bernstein History and Alternative Views of Macroeconomics Objectives - Understand each of the following: • Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression • How Keynes and the experience of the Great Depression legitimized macroeconomic policy activism • What monetarism is and its views about the limits of monetary policy • How challenges led to a revision of Keynesian ideas and the emergence of the new classical macroeconomics
AP EconomicsMr. Bernstein Classical Economics: Money and the Price Level • According to Classical Model, Prices are flexible, Agg. Supply is vertical even in short run, and an % D MS = % D PL…but D MS did not affect Y • Focus was on Long-Term • Keynes: “In the Long Run we are all dead” • Durden: ………….
AP EconomicsMr. Bernstein The Great Depression • Markets did not self-correct adequately, or in an adequate timeframe • Classical Theory failed to predict or fix the Depression • In 1936 Keynes presented The General Theory of Employment, Interest, and Money • Short-run shifts in AD were important and not temporary • Changes in “Animal Spirits” or Confidence causes shifts in AD and drove the business cycle, not MS shifts
AP EconomicsMr. Bernstein Keynes’ Theory • Classical Theory Keynesian Theory • Legitimized use of active fiscal and monetary policy
AP EconomicsMr. Bernstein The Revival of Monetary Policy • Milton Friedman, 1963: A Monetary History of the United States, 1867 – 1960 • MS fell sharply during Depression • Monetary Policy was primary • Not subject to politics • Monetarism • Steady MS growth = steady GDP growth • Natural Rate of Unemployment exists
AP EconomicsMr. Bernstein Keynesian Economics and the Political Cycle • Expansionary policy has been found to be correlated with Election cycles, not business cycles • Response to 2008 Financial Crisis: “Stimulus Package” was timed to maximize impact in 2012… • “Never Let a Good Crisis Go To Waste” • Rahm Emauel, President Obama’s Chief of Staff, Nov. 2008 http://online.wsj.com/news/articles/SB122721278056345271 • Fiscal policy goals: get elected, deal with p later • Further justifies independence of Fed