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Topic: McConnell & Brue
Chapter #19 - Disputes over Macro Theory and Policy - 15th Edition
I. Basic Objective:
To present and compare Keynesianism, Monetarism, Rational Expectationists, and
Supply Side thoughts concerning macroeconomic theories and policies.
Keynesian - Political Liberalism -- John Maynard Keynes
Free market has shortcomings
No mechanism to ensure stability in economy
Savings is not always equal to investment
Have periodic inflation and unemployment
Monopolies develop -- not always perfect competition
Markets are not always efficient -- have taxes and government regulation
Believe government should have active role in economy
Need government taxing and spending to help achieve goals
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Aggregate demand is unstable due to investment changes
Wages and prices are inflexible downward
(10) May have long periods of high unemployment
GDP = C + I + G;
National Output = Aggregate Expenditures
If S > I, have unemployment and lagging economic growth. Recessionary gap.
Solution: Increase G or decrease T, or do both.
If S < I, have inflation. Inflationary gap.
Solution: Decrease G or increase T, or do both.
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Emphasize fiscal policy. Use changes in G and T to influence economy.
Favor government intervention to correct for economic instability.
Control business cycle.
Believe economy is inherently unstable. No natural tendency to achieve a full
employment, noninflationary equilibrium GDP.
Money supply and its management are of secondary importance.
Monetarists -- Laissez Faire & Political Conservatism -- Milton Friedman
Proper money supply management is key to stable - full employment GDP
Ideas coincide with Classical Economists
Wage and price flexibility exist
Economy will naturally tend toward full employment
Free enterprise will promote best economic results
Government should stay out of economy
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