competing macro theories and issues

Chapter 11 Competing Macro Theories

I. Capitalism Theories Overview 1 video
II. Classical Economics 1 video
III. Keynesian Economics 1 video
IV. Classical v Keynesian 1 video
V. Quantity Theory of Money 2 videos
VI. Monetarism 3 videos
VII. New Classical Economics 2 videos
VIII. Supply-side Econ 3 videos

IX. Market Fundamentalism 1 video

X. Austrian School

XI. Great Recession Analyzed 2 videos

XII. Avoiding a Great "COVID" Depression NEW
XIII. Additional Learning Materials
XIV. Schools of Economics Flow Charts

XIV. US Economic Normality 1945-2015 p 2

One-Page Test Review of Chapter 11

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I. Capitalism Theories Overview A. Classical economics 1. Dominated philosophically during the late 18th, 19th and early 20th centuries. 2. First defined by Adam Smith in The Wealth of Nations - Wikipedia published in 1776. 3. Two primary beliefs a. Full employment was a norm of capitalism. b. Laissez-faire (hands-off) government policy was best. B. Keynesian economics 1. Macro equilibrium could settle at an unacceptable level of unemployed resources. 2. Government intervention could be required to fully employ resources. C. Monetarism states changes in the money supply are both a necessary and sufficient condition to cause inflation. D. New Classical economics states market forces and not government manipulation of aggregate demand and the money supply to control economic activity. 1. Supply-side economics - Wiki discussed in chapter 16, stated emphasizes increasing aggregate supply rather than increasing aggregate demand. 2. Freiburg School of the Austrian School developed in 1930's Germany after their great inflation, is followed by A. Merkel and stresses free markets with rigorous regulation. E. Overview Video Unit I Review Full employment was a norm of capitalism, Laissez-faire hands-off government policy was best. II. Classical Economics A. Basic philosophy 1. The economy is self-adjusting, government doesn't have to interfere. 2. Except for unusual circumstances (war, speculative crises), full employment would be the norm. B. Two basic theories 1. Say's law a. Supply created enough factor income to clear the market 1) Inventories will not accumulate. 2) An excess inventory slowdown which causes unemployment was not a necessity. b. Savings is not a leakage because interest rates adjust to so saving is borrowed and invested (spent). 1) Leakage describes the loss of a variable required to maintain a state of equilibrium or stable level of economic activity. 2) Interest rates drop when savings increase to insure savings is invested and there isn't leakage. c. Say's law - wiki has more information d. Will Say’s law stay dead? (Rumplestatskin, Macro Business 03/12/13 2. Price-Wage flexibility a. During periods of slow economic activity wage rates would fall and everyone wanting to work could find work. b. All factor prices, not just wages, would adjust downward and all factors would be fully employed. "Real" factor prices would therefore remain constant. C. In France, John Baptist Say produced a very superior work on the subject of Political Economy. His arrangement is luminous, ideas clear, style perspicuous, and the whole subject brought within half the volume of [Adam] Smith's work. Add to this considerable advances in correctness and extension of principles. Thomas Jefferson, letter to Joseph Milligan, April 6, 1816 Friesian School D. Other Important Classical Theories 1. Iron law of Wages 2. Malthus Essay on the Principle of Population 3. Ricardo on Rent E. Free Course Video Great Economists: Classical Economics and its Forerunners Unit II Review Say's LAW, Supply created factor income to clear the market and Price-Wage Flexibility, factor prices adjust downward	cartoonstock.com/

III. Keynesian Economics
       A. The Great Depression discredited classical economics as equilibrium settled and
            stayed at high unemployment.
       B. John Maynard Keynes
           1. Wrote The General Theory of Employment, Interest, and Money (1936).
           2. Disagreed with Say's Law: savings may not be invested.
               a. Interest rates are not the sole determinate of savings and investing.
               b. Saving and investment are done by different people with different motives.
                   Saving may not equal investment causing goods to go unsold and inventories
                   to increase.
               c. Saving is based upon "liquidity preference," the need to hold money
                   1) Transactionary Motives: for every day use.
                   2) Speculative Motives: save because prices may drop (Japan in late 1990's).
                   3) Precautionary Motives: save for uncertainty (recession, oil prices).
               d. Investment decisions are based upon profit expectations and interest rates
               e. Money balances (savings) are also important in determining aggregate demand.

           3. Disagreed with Price-Wage Flexibility: that prices would
               adjust downward insuring all resources are fully employed.
               Great Recession data proved Keynes still correct.
               see wage growth and unemployment, wages did not
               adjust. 7/16/13, Global Economic Intersection and
            Why are wages sticky
           4. Use deficit spending to stop recessions with a surplus
              to slow inflation with budget balanced over cycle.
           5. Keynesian Thinking Kahan Academy video

Unit III Review Equilibrium could settle and stay at high unemployment
requiring government deficits eventually followed by surplus

John Maynard Keynes

Keynes argued against a return to the
gold standard after the war.

IV. Classical vs. Keynesian Equilibrium A. Classical explanation 1. Prices are flexible, output is stable. 2. Changes in AD cause prices to change, AS determines Real GDP.
B. Keynesian explanation 1. Output adjusts, prices are stable. 2. Changes in AD cause changes in employment and Real GDP.
C. Aggregate supply over the business cycle 1. Q_U represents a recessionary level of Real GDP. 2. Q_F represents a full-employment level of Real GDP. 3. Aggregate supply - Wikipedia
D. Manipulating equilibrium 1. Classical economists didn't see a need as Real GDP was fixed.. 2. Keynesian economists want to manipulate AD by changing C + I + G + X_Nto maintain noninflationary full employment. 3. Aggregate demand - from Wikipedia has a more complete explanation of the Keynesian view.
E. Comparing Classical and Keynesian macro models 1. Classical and Keynesian Economics is a concise narrative of this material. 2. Aggregate Spending Model from Dr. Barbara Mikalson, Rio Hondo College 3. Elmer G. Wiens: Classical & Keynesian AD-AS Model - An on-line, interactive model of the Canadian Economy. 4. Khan Academy Keynesian vs. Classical Economics video Unit IV Review Classical: aggregate supply very inelastic, Keynes AS very elastic V. The Quantity Theory of Money A. Represents the basic theory behind macroeconomics prior to the Keynesian Revolution B. Believed that changes in the money supply would only affect price and not economic activity. C. The equation of exchange MV = PT Money Supply X Money Velocity = Average Price Level X Transactions 1. Velocity of money is how often the money supply is spent. 2. Transactions is the number in real economic activity 3. The equation is an identity a. Dollars spent = dollars received b. MV = Aggregate Demand and PT = Nominal GDP = C + I + G + X_N = GDP 4. Classical theory stated that V was basically stable and that there existed some natural level of growth for T. a. This natural level was a function of individual and business interaction. b. V and T were essentially unalterable which meant changes in M would change P and not the natural level of T. c. Government should thus refrain from interfering with market activity by adjusting the money supply. D. Came into disfavor in the 1930's with the popularity of Keynesian economics which stated that real output could be changed by affecting aggregate demand. E. Additional 1. If V Picks-Up, Will Inflation Soar 9/27/20 2. Equation Video and Velocity of Money Rather Than Quantity- Diving Prices< 3. Quantity Theory of Money? is a concise narrative. 4.Quantity theory of money - Wiki requires algebra. 5. The money-inflation connection: It's baaaack! 6. Debt-Deflation from Irving Fisher was popular in the early 1930's though Keynes won. Revisited because of the Great Recession 7. Monetary theory is non ergodic as data can't be averaged. Unit V Review Changes in the money supply would only affect price and not economic activity	The US velocity of money keeps drifting lower. A unit of credit expansion is generating an increasingly smaller amount of economic growth. Editors Note: Things have happened since the equation of exchange was developed and they increase current aggregate demand and run the risk on decreasing AD in the future. 1) Nixon took us completely off gold in early 70's. Money supply can change up or down without printing so we will never need inflation caused wheel barrows to carry money. 3) Federal debt, once only used to finance war now finances social programs. 3) States and companies promise retirement they may not easily finance in the future. Note the Federal government is not included as they can print money. For 250 years this has not been a problem. See Can We Afford a 20 Trillion Dollar Federal Deficit? We Afford Federal Entitlements? Question! How many econometric models incorporate these concepts?
	Why Debt Won’t Spark Inflation Government Debt Has Not Affected Yields

VI. Monetarism
         A. Monetarists believe that changes in the money supply are
             both a necessary and sufficient condition to cause inflation.
         B. If AD was low, increasing the money supply would only
              increase short-run economic activity.
              1. Eventually short-term expansion stops and increasing M
                  only adds to inflation.
              2. Public anticipation stops the process from being repeated.
              3. Monetarists believe that government involvement in the
                  economy, especially monetary intervention, increases the
                  magnitude of the business cycle.
         C. Keynes believed changing the money supply would affect
              interest rates which would affect investment which in turn
              would affect Real GDP
         D. To some degree monetarism is an extension of classical
              economics. Its advocates believe that a competitive market,
              free from government interference, results in economic
              stability and a reasonable growth rate.
        F. Videos
            1. Modern Money Theory
            2. Modern Money & Public Purpose video series
            3. Game of Theories: The Monetarists 6 min. 11/15/17
           Unit VI. Review: Changes in the money supply are both a necessary and
                                        sufficient condition to cause inflation.

     E. Extra Stuff
      1. The Concise Encyclopedia of Economics
             2. History of Economic Thought Website
             3. Privatize the Gains, Socialize the Losses
                is a concise history of our 20th century monetary system.
            4. Austrian School of Economics are monetarists whose
               theories are followers by conservative Europeans. Video 1   Video 2
            5. Modern Monetary Policy vs. The Austrian Society video
            6. Inflation, Fear of Inflation an Public Debt Video Princeton
              professor and Nobel Laureate Christopher A. Sims 9/2/14
     7. Bill Mitchell Demystifies Modern Monetary Theory

VII. New Classical Economics
      A. Lead by Milton Friedman - wiki , these economists revived the
             quantity theory of money. See Milton Friedman from Cato Institute
             1. Milton Friedman Video on Greed from You Tube
             2. Milton Friedman Video 30 minute interview on Open Mind
        B. Market forces and not government manipulation of aggregate
            demand and the money supply control economic activity.
       C. This economic school of thought has much in common with
             those who believe in Rational expectations.
            1. This recently formed school does not assume market
                participants have perfect knowledge.
            2. It assumes market participants will learn from experience
                and use current information to predict and adjust to an
                expected future.
            3. The result is not the disequilibrium of Keynesian economics
                with its inflationary and deflationary gaps but a constant
                equilibrium with economic behavior adjusting to be compatible
                with different levels of economic activity.
            4. As with the classical school, the new classical school, monetarist,
                 and those believing in rationalist expectation feel government
                 involvement in econo ic activity is not beneficial.
       D. Reasons for self-correction nature of capitalism
            1. Wages are Inflexible downward as employers face a minimum
                wage and lower wages cause low morale and less efficiency.
                Robert King: The Concise
           3. Critique of neoclassical economics, did anything change 2/26/14
           4. New Classical Macroeconomics from Wiki
           5. What-is-neoclassical-economics
           6. Austrian School Debate

Unit VII Review Market forces not government manipulation of AD
and the money supply control economic activity.
VIII. Supply-side Economists
   A. Slow economic growth and high inflation of the 1970's caused
            some economists to emphasize increasing Aggregate Supply.
      B. Stagflation and the Rise of Supply-Side Economics.
      C. Video for and Video against 2 min. each
      D. Reagan Revolution 14 min.
IX. Markets Fundamentalism
     A. Believed in by Laissez fair and Chicago School
     B. Based on always rational actors, i.e.. Economic Man Doctrine
     C. Maximize self Interest i.e. profit maximization in a system of
          full information and limited resources

      Increase Aggregate Supply not Government Spending
                     to enhance economic growth.
XI. Great Recession Analyzed
   A. U.S. has successfully used Keynesian economics to quickly
             negate the recession, will inflation follow?
        B. Germany's enforcing Austrian School austerity and slow growth
            In the money supply for Europe has resulted in recessions and
           slow growth
       C. Great Brittan is still in or close to recession because of austerity
           and an easy money policy has yet to work. Economist Magazine
       D. Cheat Sheet for Understanding the Different Schools of Economics
       E. Videos
           1. Quick History 11 min
           2. Financial Mediation video follows the money 13 min.

Federal Reserve in Action

Macro Chapters

8) Measuring Total Economic Activity

9) The Business Cycle

10) Macro Equilibrium

11) Competing Macro Theories and Issues

10) Macro Equilibrium

11) Competing Macro Theories and Issues

12 Keynesian Economics: An Expanded View

13 Money, Banking, Creation of Money

See
Financial Crisis

The Great Recession

14) Fiscal Policy

15) Monetary Policy

16) Stagflation:Rise of Supply-Side Economics
17) Budget Deficits

See
Democratic Capitalism vs. Capitalistic Democracy

XII. Avoiding a Great "COVID" Depression

XIII. Additional Learning Materials
    A. Readings, Videos, Podcasts
        1. Reconciling Hayek and Keynes short article 6/7/14
        2. GDP A Brief But Affectionate History 7/20/14
       3. Democratic Capitalism vs. Capitalistic Democracy
     4. History of New Keynesianism/
        5. How Laissez Faire Economics Lead to Inequality Recession
        6. Stagflation and the Rise of Supply-Side Economics:
            the brake-down of the Phillips curve.
       7. Progression of Economic Theory, Classical to Keynesian back to Classical
       8. Great Recession from a Classical-Keynesian View
           from Roger Farmer Pepperdine School of Public Policy
           a. Who are the Academic Scribblers 9.11
           b. Refining Classical Economics 9.29
           c. Effect of the Great Depression 9.14
           d. 1970's oil shock shocks the world of economics 8.52
           e. How bad is the economy and where is it going 7.41
       9. Crash Course in Non-Equilibrium Economics 6 videos
     10. Macro Musings Podcast Claudio Borio one hour
B. Current Political Economic Controversies has an interesting economics section.

XIV. Schools of Economics Flow Charts

Western Political Economy Since 1843

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Chapter 11 Class Discussion Questions Table of Contents

Chapter 11 Homework Questions Economics Internet Library

VI. Monetarism A. Monetarists believe that changes in the money supply are both a necessary and sufficient condition to cause inflation. B. If AD was low, increasing the money supply would only increase short-run economic activity. 1. Eventually short-term expansion stops and increasing M only adds to inflation. 2. Public anticipation stops the process from being repeated. 3. Monetarists believe that government involvement in the economy, especially monetary intervention, increases the magnitude of the business cycle. C. Keynes believed changing the money supply would affect interest rates which would affect investment which in turn would affect Real GDP D. To some degree monetarism is an extension of classical economics. Its advocates believe that a competitive market, free from government interference, results in economic stability and a reasonable growth rate. F. Videos 1. Modern Money Theory 2. Modern Money & Public Purpose video series 3. Game of Theories: The Monetarists 6 min. 11/15/17 Unit VI. Review: Changes in the money supply are both a necessary and sufficient condition to cause inflation. E. Extra Stuff 1. The Concise Encyclopedia of Economics 2. History of Economic Thought Website 3. Privatize the Gains, Socialize the Losses is a concise history of our 20th century monetary system. 4. Austrian School of Economics are monetarists whose theories are followers by conservative Europeans. Video 1 Video 2 5. Modern Monetary Policy vs. The Austrian Society video 6. Inflation, Fear of Inflation an Public Debt Video Princeton professor and Nobel Laureate Christopher A. Sims 9/2/14 7. Bill Mitchell Demystifies Modern Monetary Theory VII. New Classical Economics A. Lead by Milton Friedman - wiki , these economists revived the quantity theory of money. See Milton Friedman from Cato Institute 1. Milton Friedman Video on Greed from You Tube 2. Milton Friedman Video 30 minute interview on Open Mind B. Market forces and not government manipulation of aggregate demand and the money supply control economic activity. C. This economic school of thought has much in common with those who believe in Rational expectations. 1. This recently formed school does not assume market participants have perfect knowledge. 2. It assumes market participants will learn from experience and use current information to predict and adjust to an expected future. 3. The result is not the disequilibrium of Keynesian economics with its inflationary and deflationary gaps but a constant equilibrium with economic behavior adjusting to be compatible with different levels of economic activity. 4. As with the classical school, the new classical school, monetarist, and those believing in rationalist expectation feel government involvement in econo ic activity is not beneficial. D. Reasons for self-correction nature of capitalism 1. Wages are Inflexible downward as employers face a minimum wage and lower wages cause low morale and less efficiency. Robert King: The Concise 3. Critique of neoclassical economics, did anything change 2/26/14 4. New Classical Macroeconomics from Wiki 5. What-is-neoclassical-economics 6. Austrian School Debate Unit VII Review Market forces not government manipulation of AD and the money supply control economic activity. VIII. Supply-side Economists A. Slow economic growth and high inflation of the 1970's caused some economists to emphasize increasing Aggregate Supply. B. Stagflation and the Rise of Supply-Side Economics. C. Video for and Video against 2 min. each D. Reagan Revolution 14 min. IX. Markets Fundamentalism A. Believed in by Laissez fair and Chicago School B. Based on always rational actors, i.e.. Economic Man Doctrine C. Maximize self Interest i.e. profit maximization in a system of full information and limited resources Increase Aggregate Supply not Government Spending to enhance economic growth. XI. Great Recession Analyzed A. U.S. has successfully used Keynesian economics to quickly negate the recession, will inflation follow? B. Germany's enforcing Austrian School austerity and slow growth In the money supply for Europe has resulted in recessions and slow growth C. Great Brittan is still in or close to recession because of austerity and an easy money policy has yet to work. Economist Magazine D. Cheat Sheet for Understanding the Different Schools of Economics E. Videos 1. Quick History 11 min 2. Financial Mediation video follows the money 13 min.	Federal Reserve in Action Macro Chapters 8) Measuring Total Economic Activity 9) The Business Cycle 10) Macro Equilibrium 11) Competing Macro Theories and Issues 10) Macro Equilibrium 11) Competing Macro Theories and Issues 12 Keynesian Economics: An Expanded View 13 Money, Banking, Creation of Money See Financial Crisis The Great Recession 14) Fiscal Policy 15) Monetary Policy 16) Stagflation:Rise of Supply-Side Economics 17) Budget Deficits See Democratic Capitalism vs. Capitalistic Democracy
XII. Avoiding a Great "COVID" Depression

XIII. Additional Learning Materials A. Readings, Videos, Podcasts 1. Reconciling Hayek and Keynes short article 6/7/14 2. GDP A Brief But Affectionate History 7/20/14 3. Democratic Capitalism vs. Capitalistic Democracy 4. History of New Keynesianism/ 5. How Laissez Faire Economics Lead to Inequality Recession 6. Stagflation and the Rise of Supply-Side Economics: the brake-down of the Phillips curve. 7. Progression of Economic Theory, Classical to Keynesian back to Classical 8. Great Recession from a Classical-Keynesian View from Roger Farmer Pepperdine School of Public Policy a. Who are the Academic Scribblers 9.11 b. Refining Classical Economics 9.29 c. Effect of the Great Depression 9.14 d. 1970's oil shock shocks the world of economics 8.52 e. How bad is the economy and where is it going 7.41 9. Crash Course in Non-Equilibrium Economics 6 videos 10. Macro Musings Podcast Claudio Borio one hour B. Current Political Economic Controversies has an interesting economics section.

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	Chapter 11 Class Discussion Questions	Table of Contents
	Chapter 11 Homework Questions	Economics Internet Library