A Keynes vs Monetarist view JOHN MAYNARD KEYNES KEYNES THEORY Looks at the role that fiscal policy can play in stabilizing the economy Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker ID: 345708
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Slide1
MACRO ECONOMIC POLICY
A Keynes
vs
Monetarist viewSlide2
JOHN MAYNARD KEYNESSlide3
KEYNES THEORY
Looks at
the role that
fiscal policy
can play in
stabilizing
the economy.
Keynesian
theory suggests that higher government spending in a recession can help the economy recover quicker.
Keynesians
say it is a mistake to wait for markets to clear like classical economic theory suggestsSlide4
MAIN THOUGHTS [1]
I
n
a recession, people responded to the threat of unemployment by
increasing
saving
&
reducing
spending
Slide5
MAIN THOUGHTS
[2]
RECESSION
Government intervention
STIMULATES AD and REAL GDPSlide6
Can you show this RESULT on a graph?
Slide7
Does yours look like this?
What about Policy Tools?
Which ones can be used to stimulate ADSlide8
What are YOUR THOUGHTS???Slide9
So What about AGGREGATE SUPPLY ???
Slide10
MAIN THOUGHTS [3]
Wages
may be ‘sticky
downward’/ inflexible
’
Workers do not accept
nominal wage cuts
,
Firms have to lay off workers This can lead to
involuntary unemployment.
The economy slows downSlide11
MAIN THOUGHTS [4]
I
n
a recession,
an
economy
has spare capacity,
SO:increasing AD will have an impact on real output and only minimal effect on the price level
.Slide12
(
C + I + G + X – M).
INCREASE SPENDINGSlide13
MAIN THOUGHTS [5]
Keynesians
believe
there is
a multiplier
effect
This
means an initial injection (
eg increased government spending) into the circular flow can lead to a bigger final increase in real GDPSlide14
“It is more important to reduce
unemployment
than
inflation”Slide15
Keynesians
support
expansionary fiscal policy in a recession.
Keynesians reject real business cycle theories
(an idea that the government can have no influence over the economic cycle)
WHAT does this mean???Slide16
MILTON FRIEDMAN
Slide17
MONETARISTS VIEW
The economy is naturally stable.
Markets work well when left to themselves.
Government interference can
weaken
the economy
Fiscal Policy is often bad policy.
A small role for government is good.Slide18
SOME THOUGHTS
Monetarists stress the importance of
controlling the money supply
to keep inflation low
Focus on
MONETARY POLICY TOOLS
which increase or decrease the supply of money and credit.Slide19
CONTROL MONEY SUPPLYSlide20
CONTROL of MONEY SUPPLY?
M
V
=PQ
IN THE SHORT RUN velocity
is
stable.
This
implies that in the short run, changes in the money supply are the dominant forces that change nominal GDP.Slide21
CONTROL of MONEY SUPPLY?
M
V
=P
Q
)
IN THE LONG RUN the economy is at potential output, so changes in the money supply only lead to higher prices, not higher outputSlide22
CONTROL OF MONEY SUPPLY
SHORT RUN?
LONG RUN?
SHOW THE DIFFENCE BY DRAWING THE AD/AS GRAPHS.Slide23
SOME THOUGHTS
Monetarists
stress the role of the natural rate of unemployment (supply side
unemployment)Slide24
Some thoughts
Monetarists more likely to place emphasis on reducing inflation than
keeping
unemployment
low
MONETARISTS
say …
“REDUCE INFLATION”Slide25
"Inflation is always and everywhere a monetary phenomenon
."Slide26
COMPLETE THE TABLE
KEYNESIAN
MONETARIST
REGULATOR?
POLICY ?
POLICY
TOOLS?
AD?
AS?
GRAPH(S)Slide27
So Who is right ????