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Chapter 17 Lecture Notes

Chapter 17 Lecture Notes - CHAPTER SEVENTEEN DISPUTES IN...

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CHAPTER SEVENTEEN DISPUTES IN MACRO THEORY AND POLICY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Contrast the classical and Keynesian views of the aggregate supply curve. 2. Compare the classical and Keynesian views of the stability of the aggregate demand curve. 3. Give two reasons for macroeconomic instability according to mainstream economists. 4. Explain the equation of exchange. 5. Identify the single most important cause of macroeconomic instability according to the monetarists. 6. Explain the main reasons for macro economic instability according to the real-business-cycle theory. 7. Construct an example to demonstrate a coordination failure. 8. Differentiate between the adaptive expectations view of monetarists and the rational expectations view held by other new classical economists. 9. Explain the view of self correction held by mainstream economists. 10. List three reasons why a higher wage could result in greater efficiency. 11. Explain how insider-outsider relationships contribute to downward wage inflexibility. 12. Describe the monetary rule and explain why monetarists prefer it to discretionary monetary policy. 13. Compare the views of mainstream economists with monetarists and RET economists regarding the use of discretionary fiscal policy and the need for an annually balanced budget. 14. Define and explain the terms and concepts listed at the end of the chapter. LECTURE NOTES I. Introduction A. One of the great traditions in scholarship is the challenging of “mainstream” thinking. B. Many challenges to the “conventional wisdom” fail; some gain full support and replace the existing theories. C. More often, the new ideas modify the existing body of mainstream thinking, which thereafter is improved or extended. D. This chapter examines some of the major disputes in macro theory and policy. 1. Historical background contrasting the classical and Keynesian macroeconomic theories is provided. 2. Contemporary disagreements on three inter-related questions are considered. a. What causes instability in the economy? 215
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Disputes in Macro Theory and Policy b. Is the economy self correcting? c. Should government adhere to rules or use discretion in setting economic policy? II. Some History: Classics and Keynes A. Classical economics dominated the discipline in the 1800’s. It maintained that full employment was normal and that a “laissez-faire” (let it be) policy by government is best. B. Keynes contended in the 1930’s that laissez-faire capitalism is subject to recurring recessions or depressions with widespread unemployment. Active government stabilization policy is required to avoid the waste of idle resources. C.
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Chapter 17 Lecture Notes - CHAPTER SEVENTEEN DISPUTES IN...

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