420+3.0+Keynesian+_Partially+Complete+02_19_ - Econ 420 Intermediate Theory Money Income Employment Prof Aguilar Econ420 | Prof Aguilar 1 Section 3

420+3.0+Keynesian+_Partially+Complete+02_19_ - Econ 420...

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Econ420 | Prof. AguilarEcon 420Intermediate Theory: Money, Income, & EmploymentProf. Aguilar1
Econ420 | Prof. Aguilar3.0 –Keynesian TheorySection 3 –Keynesian Theory3.2 – Aggregate Demand3.3 – Aggregate SupplyBy the end of this section you will be able to : motivate the need for an alternative to Classical thoughtdescribe the main characteristics of the Great Depression3.4 – Equilibrium3.1 – Introduction via the Great Depression2
Econ420 | Prof. AguilarSection 3 –Keynesian Theory3Mercantilism (1500-1600)Bullionism Government Intervention Classical Theory (1770’s -1930’s)Money is a VeilFree Markets
Econ420 | Prof. AguilarSection 3 –Keynesian Theory41929.01930.01931.01932.01933.01934.01935.01936.01937.01938.01939.01940.0051015202530Unemployment Rate (%)
Econ420 | Prof. AguilarSection 3 –Keynesian Theory51929.01930.01931.01932.01933.01934.01935.01936.01937.01938.01939.01940.0-20-15-10-505101520Real GDP (y/y% change)
Econ420 | Prof. AguilarSection 3 –Keynesian Theory6
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Econ420 | Prof. AguilarSection 3 –Keynesian Theory9
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Econ420 | Prof. AguilarSection 3 –Keynesian Theory13Policy Action in the U.S. President Hoover raises taxes in 1932Presidential candidate Franklin Roosevelt argued for cuts in government spending. Presidential advisor Bernard Baruch summarized:
Econ420 | Prof. AguilarSection 3 –Keynesian Theory14Policy Action in the U.S. President Hoover raises taxes in 1932Reason: Balance the BudgetPresidential candidate Franklin Roosevelt argued for cuts in government spending. Reason: Balance the BudgetPresidential advisor Bernard Baruch summarized: Balance the budgets, stop spending money we haven’t got. Sacrifice for frugality and revenue. Cut government spending – cut it as rations in a siege. Tax – tax everybody for everything.
Econ420 | Prof. AguilarSection 3 –Keynesian Theory15Explaining Great Depression in Classical Modeli) Demand Side PYASAD1AD2Prices dropped during the Depression, ..but the magnitude of the drop in P not warranted from drop in M, and… that does not explain the drop in output. PMQTM:
Econ420 | Prof. AguilarSection 3 –Keynesian Theory16Explaining Great Depression in Classical Modelii) Supply Side…the predicted increase in prices runs contrary to evidence. A drop in labor is consistent with a drop in output, but…why did employment drop in the first place?, andPYAS1AD1AS2
Econ420 | Prof. AguilarSection 3 –Keynesian Theory17Explaining Great Depression in Classical Modeliii) Supply & DemandSimultaneous Supply and Demand shocks are consistent with the direction of movements in Y&P, …but that still doesn’t explain WHY labor contracted.

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