AP Economics
Mr. Bernstein
Module 35:
History and Alternative Views of
Macroeconomics
March 23, 2015
AP Economics
Mr. Bernstein
History and Alternative Views of Macroeconomics
Objectives - 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 Economics
Mr. 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 Economics
Mr. 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 Economics
Mr. Bernstein
Keynes’ Theory
• Classical Theory
Keynesian Theory
• Legitimized use of active fiscal and monetary policy
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AP Economics
Mr. 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 Economics
Mr. 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
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