AP Economics

Mr. Bernstein

Module 35: History and Alternative Views of

Macroeconomics

March 23, 2015

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AP EconomicsMr. Bernstein

History and Alternative Views of MacroeconomicsObjectives - 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

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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: ………….

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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

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AP EconomicsMr. Bernstein

Keynes’ Theory• Classical Theory Keynesian Theory

• Legitimized use of active fiscal and monetary policy

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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

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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