Chapter 11 Competing Macro Theories and Issues
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
VIII. Supply-side Econ 3 videos
X. Great Recession Analyzed 2 videos
X. Additional Learning Materials
XI. Schools of Economics Flow Chart
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,
II. Classical Economics
2. Price-Wage flexibility
C. In France, John Baptist Say produced a very superior work on the subject of Political
Unit II Review
Supply created factor income to clear the market
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
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.
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
Keynes argued against a return to the
IV. Classical vs. Keynesian
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
1. QU represents a recessionary level of Real GDP.
2. QF 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 + XN to 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
V. The Quantity
Theory of Money
4. Classical theory stated that V was basically stable and
1. Equation Video and Velocity of Money Rather Than Quantity- Diving Prices<
2. Quantity Theory of Money? is a concise narrative.
3.Quantity theory of money - Wiki requires algebra.
4. The money-inflation connection: It's baaaack!
5. Debt-Deflation from Irving Fisher was popular in
the early 1930's though Keynes won. Revisited
because of the Great Recession
6. Monetary theory is non ergodic as data can't be averaged.
Changes in the money
The US velocity of money keeps drifting lower. A unit of credit expansion is generating an increasingly smaller amount of economic growth.
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.
Unit VI. Review: Changes in the money supply are both a necessary and
sufficient condition to cause inflation.
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 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
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
6. Austrian School Debate
Unit VII Review
Market forces not government manipulation of
VIII. Supply-side Economists
Great Recession Analyzed
X. Additional Learning
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.
Federal Reserve in Action
Measuring Total Economic Activity
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