Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Steady-state economy wikipedia , lookup
Edmund Phelps wikipedia , lookup
Non-monetary economy wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Transformation in economics wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Keynesian economics wikipedia , lookup
Ben Bernanke wikipedia , lookup
Chapter 16 Macroeconomics: What have we learnt? Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-1 Learning objectives 1. What lessons have been learnt from the Great Depression? 2. What lessons have been learnt from the Great Inflation? 3. What challenges remain in the field of economic growth? 4. How would one distinguish a Keynesian economist? 5. In what ways did the monetarist school present a challenge to Keynesian economics? 6. How do new classical macroeconomists differ from Keynesian economists and monetarists? 7. For what reason or reasons do new Keynesian macroeconomists advocate government management of the economy? 8. According to real business cycle theorists, from where do business cycle fluctuations in real output originate? Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-2 Chapter organisation 16.1 Lessons from the past 16.2 Schools of thought in macroeconomics 16.3 Some concluding thoughts Summary Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-3 Great depression • Four calamitous economic events occurred in the 20th century that contributed to economic knowledge. • The first was the Great Depression of the 1930s. Prior to that it was believed that the price system would adjust so that any deviations of output from potential were short-lived. • Keynes explained that, in the short run, economic activity depends on the level of AD, and that government has a role to play in influencing AD. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-4 Great inflation • The second major economic event of the 20th century was the Great Inflation of the 1970s and 1980s. This showed us that, contrary to then-current belief, a high rate of inflation can co-exist with a high rate of unemployment. • Once inflation has occurred in the economy, it can become entrenched through people building on inflation through their inflationary expectations. • The answer to this is credible monetary policy, so people truly believe not to expect further inflation. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-5 Unequal growth outcomes • The third calamitous event is the disparity of growth outcomes across countries. • Countries grow at different rates for a variety of reasons. Understanding of why this is has improved, but knowing how to improve lagging countries is another thing. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-6 The 2008 global financial crisis • The global financial crisis in 2008 has shown that demand management policies may still be needed. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-7 Chapter organisation 16.1 Lessons from the past 16.2 Schools of thought in macroeconomics 16.3 Some concluding thoughts Summary Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-8 Keynesian economics • Keynesians believe the demand side of the economy is the key to business-cycle fluctuations. • Investment demand is built on expectations of future profit. The greatest influence of expectations for the future is the current situation. • If the current economic situation is a downturn, it is difficult for a firm to consider investing. Aggregate demand will only increase if many firms increase investment. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-9 Keynesian economics (cont.) • This is a co-ordination failure, as without a co-ordinated plan of a whole range of firms investing, no firm will feel confident enough to be the first. • The result is the economy becomes trapped in a selfperpetuating, low investment–low output equilibrium. • Governments should use fiscal and monetary policies to maintain a high level of aggregate demand so the economy remains at potential output. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-10 Monetarism • Emerging in the 1960s and early 1970s, monetarists disagreed with the view that the economy could be trapped in a self-perpetuating low output –high unemployment equilibrium. • They believed that the economy would return to potential output in the long run after a shift in aggregate demand. • They also believed that if there was a recession, it was most likely due to poor government policy. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-11 Monetarism (cont.) • Governments should avoid policies that lead to high inflation. • Monetarists believed the cause of the Great Depression was a contractionary monetary policy when an expansionary monetary policy was needed. • Monetarists gained influence as a result of the Great Inflation of the 1970s that was caused by the oil shocks. Keynesian policies were not helpful in economies with both high inflation and high unemployment. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-12 New classical macroeconomics • These economists also believe that the economy will return to potential output in the long run after a shift in aggregate demand. • Workers and firms are said to have rational expectations, which involves a complete understanding of the structure of the economy. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-13 New classical macroeconomics (cont.) • Therefore workers and firms will organise their affairs based on an understanding that the economy will be at potential output, and any change in AD will only change inflation. • Therefore they will negotiate nominal prices so that real wages, employment and output don’t change. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-14 New Keynesian macroeconomics • New Keynesians believe that imperfections in markets—imperfect information, monopoly, trade unions, etc.— impede the price system to restore potential GDP after a demand or supply disturbance. • Therefore there is a role for government policy to try to improve macroeconomic performance. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-15 Growth theory and the real business cycle school • The real business cycle school believes that business cycles are not due to fluctuations in AD, but rather to fluctuations in potential GDP resulting from technological shocks. • These events can produce short-run effects that look like business-cycle effects. • For example, a reduction in total factor productivity would decrease the marginal productivity of labour. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-16 Growth theory and the real business cycle school (cont.) • This shifts the labour demand curve to the left and a lowers the real wage, leading to a fall in employment and therefore output. • What looks like a recession may just be an efficient response to a productivity decline. • Economists generally believe such productivity shocks are a factor in the business cycle, but that AD changes are still an important part of the explanation of the business cycle. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-17 Chapter organisation 16.1 Lessons from the past 16.2 Schools of thought in macroeconomics 16.3 Some concluding thoughts Summary Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-18 Some concluding thoughts • Macroeconomics has been informed by historical events. • Macroeconomics provides a systematic framework within which important social trends are analysed. • Macroeconomics is a strand of theory that is constantly evolving. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-19 Chapter organisation 16.1 Lessons from the past 16.2 Schools of thought in macroeconomics 16.3 Some concluding thoughts Summary Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-20 Summary • Four major episodes in macroeconomics include the Great Depression, the Great Inflation, disparity of growth and the global financial crisis. • Keynesians and new Keynesians believe that the economy can be away from potential output for prolonged periods of time and that this provides a rationale for government management of the economy. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-21 Summary (cont.) • Monetarists and new classical macroeconomists believe that the price system will quickly return the economy to potential output following a shift in the AD curve. • Real business cycle theorists look to the economy’s supply side as the source of business cycle fluctuations. Copyright © 2011 McGraw-Hill Australia Pty Ltd PowerPoint slides to accompany Principles of Macroeconomics 3e by Bernanke, Olekalns and Frank 16-22