Eco 200 – Principles of
Macroeconomics
Chapter 16: Alternative macroeconomic models
Alternative macroeconomic
models




Fixed-price Keynesian model
New Keynesian model
Monetarist model
New classical model
Fixed-price Keynesian model

Assumes a constant price level
Fixed-price Keynesian model


Assumes a constant price level
This model was popular during and
immediately after during the Great
Depression

little concern about inflation
Fixed-price Keynesian model
Policymakers’ role in the fixedprice Keynesian model

private economy is inherently unstable
Policymakers’ role in the fixedprice Keynesian model


private economy is inherently unstable
advocates active role for government in
stabilizing the economy
New Keynesian model

Recognizes
that the
price level
is not
constant
New Keynesian model

New Keynesians argue that prices and
wages are not flexible (especially in a
downward direction) in the short run
New Keynesian model


New Keynesians argue that prices and
wages are not flexible (especially in a
downward direction) in the short run
Firms respond to a reduction in the
demand for output by cutting
production (and labor use), not prices
(and wages)
Policymakers’ role in the New
Keynesian model

Essentially the same as for traditional
Keynesians (but with more attention
paid to inflation)
Monetarist economics

Money supply affects output and the
price level in the short run
Monetarist economics


Money supply affects output and the
price level in the short run
Economy is believed to be inherently
stable, with rapid self-adjustment.
Monetarist economics



Money supply affects output and the
price level in the short run
Economy is believed to be inherently
stable, with rapid self-adjustment.
Lags:



recognition lag
reaction lag
effect lag
Policymakers’ role under
monetarist economics

Believe that discretionary policy is
inherently destabilizing due to long and
variable lags
Policymakers’ role under
monetarist economics


Believe that discretionary policy is
inherently destabilizing due to long and
variable lags
Prefer a reliance on fixed rules
New classical model

Classical model
was the
dominant
macroeconomic
theory until the
Keynesian
revolution
New classical model

relies on rational expectations
New classical model


relies on rational expectations
wages and other resource prices are
assumed to respond immediately to any
anticipated policy change
New classical model
Policymakers’ role under the
new classical model

discretionary policy is not effective
Policymakers’ role under the
new classical model


discretionary policy is not effective
prefer the use of fixed rules (with
credible policy announcements)