KW_Macro_Ch_17_Sec_05_The_Modern_Consensus

KW_Macro_Ch_17_Sec_05_The_Modern_Consensus - chapter 17 The...

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>> The Making of Modern Macroeconomics Section 5: The Modern Consensus chapter 17 As we’ve seen, there were intense debates about macroeconomics in the 1960s, 1970s, and 1980s. More recently, however, things have settled down. The age of macroeco- nomic controversy is by no means over, but there is now a broad consensus about sev- eral crucial macroeconomic issues. To understand the modern consensus, where it came from, and what still remains in dispute, we’ll look at how macroeconomists have changed their answers to five key questions about macroeconomic policy. The five questions, and the answers given by macroeconomists over the past 70 years, are summarized in Table 17-1. Notice that classical macroeconomics said no to each question; basically, classical macroecono- mists didn’t think macroeconomic policy could accomplish very much. But let’s go through the questions one by one.
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2 CHAPTER 17 SECTION 5: THE MODERN CONSENSUS Is Expansionary Monetary Policy Helpful in Fighting Recessions? As we’ve seen, classical macroeconomists generally believed that expansionary mon- etary policy was ineffective or even harmful in fighting recessions. In the early years of Keynesian economics, macroeconomists weren’t against monetary expansion dur- ing recessions, but they tended to believe that it was of doubtful effectiveness. Milton Friedman and his followers convinced economists that monetary policy is effective after all. Nearly all macroeconomists now agree that monetary policy can be used to shift the aggregate demand curve and to reduce economic instability. The classi- cal view that changes in the money supply affect only aggregate prices, not TABLE 17-1 Five Key Questions About Macroeconomic Policy Classical Keynesian Modern macroeconomics macroeconomics Monetarism consensus Is expansionary monetary policy helpful in fighting recessions? Is fiscal policy effective in fighting recessions? Can monetary and/or fiscal policy reduce unemployment in the long run? Should fiscal policy be used in a discretionary way? Should monetary policy be used in a discretionary way? No No No No No Not very Yes Yes Yes Yes Yes No No No No Yes, except in special circumstances Yes No No, except in special circumstances Still in dispute
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aggregate output, has few supporters today. The view once held by some Keynesian economists—that changes in the money supply have little effect—has equally few supporters. The exception to this view is the case of a liquidity trap, in which monetary policy is ineffective. Is Fiscal Policy Effective in Fighting Recessions? Classical macroeconomists were, if anything, even more opposed to fiscal expansion than monetary expansion. Keynesian economists, on the other hand, gave fiscal pol- icy a central role in fighting recessions. Monetarists argued that fiscal policy was inef- fective as long as the money supply was held constant. But that strong view has become relatively rare. Most macroeconomists now agree that fiscal policy, like monetary policy, can shift
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_17_Sec_05_The_Modern_Consensus - chapter 17 The...

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