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econ 331 final notes

econ 331 final notes - 3/29 Supply function theories o...

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3/29 Supply function theories o Neoclassical and new classical believe inelastic o Neoclassical—long run o New classical, Keynesian, hicks, monetarist—short run. o Keynesian supply function From perfectly elastic to perfectly inelastic. Due to breakdown of monopoly oligopoly on production side. o Hicks: incentive to join labor force as higher wages cause given output to rise. o Pooling: workers respond to higher wages even though they don’t really get increased wages (because firms adjust prices) o Monetarists Support full employed economy. At that point, further aggregate demand only gives inflation and no more output. 4/3 Inflation in closed economy o Keynesian Inflation occurs when employment is less than full Increase in wages—higher prices (COST-PUSH inflation) o Monetarist One source of inflation: Demand pull inflation Expanding money supply faster than output could grow 2 types of inflation: pure and repressed pure inflation did not impose much cost on the economy Higher inflation greater tax on cash balance Like Keynesians, monetarists said inflation would cause partial wage and price control Would change allocation of resources and alter importance of industries in the economy This involves real cost and will lower value of GDP Repressed inflation is more severe at higher inflation rates o Hicksian Allows cost-push inflation If you don’t expand AD, growth rate will fall (less than Keynes but more than monetarists) Gives you tradeoff between inflation and growth. Worried about WAGE-PRICE SPIRALING) Wage bargaining results in both wage and price increases. This can produce adverse social consequences. o Neoclassical One exception: zero inflation as the only acceptable rate. Comes from Germany’s hyperinflation in 1923
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Germany stripped of 2 industrial areas—east and west germany High reparations to be paid to france and Britain Germany could not receive loans. They refused to pay taxes and couldn’t pay reparations. They printed money, couldn’t own foreign exchange, and that led to hyperinflation. o How to control inflation Gradualist approach Reduce it slowly Reduce the real cost Output and employment will fall gradually if AD reduction is gradual. (neoclassicals were against gradual) gradual approach did not work in south America o New classical Indifferent about monetary policy Agree with monetarists that pure inflation doesn’t cost much Expected monetary policy has no effect on levels of output, employment, prices. Relying on surprises will end you up with unstable AD situation. They are not concerned about inflation in a country with perfect expectation.
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