Download SOTU and the Contemporary Macroeconomic Consensus

Answers “SRPC Analysis”:
Answers 2 & 5:
1.
Move along (leftwards)
2.
Shift SRPC left
3.
Shift SRPC right (expectations rising)
4.
Move along (rightwards)  decrease in AD!
5.
Shift SRPC left (expectations falling)
6.
SRPC
SRPC2
Move along (rightwards)
Answer 3:
Answer 1:
Answers 4 & 6:
.A
.B
.B
.A
SRPC
SRPC2
SRPC
SRPC
Tuesday’s E.C. Quiz Results
a/b.
d.
Inf.
Rt.
SRPC2
SRPC
Unemployment Rt.
b. Expected rate of
inflation increases
c. No effect on the
LRPC (curve itself
does not shift)
i. Nominal IRs will increase!
(inflation is rising, so must nominal
prices/interest)
ii. Real IRs will remain
unchanged! Will return back to a
point along the LRPC)
Remember: Real values in the longrun do not change!
e. R = N ─ Inf.
R=8─3
R = 5% real interest
SOTU & the Modern
Macroeconomic
Consensus
: Students will assess President Obama’s SOTU Address from
opposing schools of economic thought in order to form
conclusions about the contemporary macroeconomic consensus.
3 Leading Schools of Macroeconomic
Thought:
 Keynesian
(Policy Activism):
 The
general Theory of Employment, Interest, and
Money 1936. Roots founded during Great Depression
 Short-run
bursts of AD to promote short-run growth &
“animal spirits”
 “We’re
all dead in the long-run”—balanced budget it
not central focus
 Asserted
expansionary monetary policy would be
ineffective in the face of recession…liquidity trap
3 Leading Schools of Macroeconomic
Thought:
 Monetarist
A
(Discretionary Monetary Policy):
Monetary History of the United States, 1867-1970
Friedman & Schwartz showed business cycle
fluctuations link to the money supply
 FED policy to steadily increase the money supply to
steadily increase GDP regardless of business cycle
 Take all decision-making away from politicians & avoid
the lag that comes with discretionary fiscal policy
 In fact, discretionary fiscal policy only prolongs
recession
 Very little contemporary support—research has shows
too much monetary policy can destabilize (inflation)
3 Leading Schools of Macroeconomic
Thought:
 Classical
(New Supply-Siders):
A
change in AD cannot have an impact on the aggregate
output of an economy, only the price level
 Muth’s
Rational Expectations: people and firms are
Rationale and utilize all information available to
them…essentially eliminating “sticky” inputs
 If
you are going to negotiate a contract all past
experiences and future predictions allow you to
anticipate inflation
 Real
Business Cycle Theory: changes in productivity are
the sole determinants of business cycle fluctuations (AS
is perfectly vertical)
SOTU 2015: Economic Highlights

https://www.youtube.com/watch?v=tIafRj_p95M

LISTEN CAREFULLY AND BE PREPARED TO DO SOME ANALYSIS OF PRESIDENT
OBAMA’S PROPOSALS
The Current Macroeconomic Perspective
(as proposed by your textbook)
Is expansionary monetary policy
helpful in fighting recessions?
Yes—except in special circumstances
(liquidity trap)
Is expansionary fiscal policy effective
in fighting recessions?
YES.
Can monetary and/or fiscal policy
reduce unemployment in the longrun?
NO.
Should fiscal policy be used in a
discretionary way?
No—except in special circumstances
Should monetary policy be used in a
discretionary way?
Still in dispute…
2-Minute Paper:
1.
Assume that the US decides, albeit
misguidedly, to grant the President absolute
control over fiscal and monetary policy. You
are currently the President of the United
States. What actions do you take given the
current state of the economy? Give 3
supporting details.
2. Why is there a debate about the correct actions
for a government to take in the face of economic
fluctuations.