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Justin Sousa 1December 7, 2016Mod 35: History and Alternative Views of MacroeconomicsMoney and the Price Level-Previously discussed, the classical model of the price level states that prices are flexible,making the aggregate supply curve vertical even in the short-run-The attitude of regarding short-run effects as unimportant led to the development of JohnMaynard Keynes’ scoff of the focus on long-run effectsThe Business Cycle-In 1920, Wesley Mitchell founded theNational Bureau of Economic Research, anindependent, nonprofit organization that declares the beginnings of recessions andexpansions-However, economists lacked a solid theory of of business cycles and therefore wereunable to settle on the proper policies to take in certain economic situationsKeynes’ Theory-Keynes’The General Theory of Employment, Interest, and Moneyis arguably one of themost influential pieces on economics ever written-Panel A: The short-run aggregate supply curve is vertical. The decline in AD leads to afall in the aggregate price level, from P1to P2, but no change in the aggregate output-Panel B: Short-run aggregate supply curve slopes upward, so decline in AD leads to botha fall in aggregate price level, from P1to P2, and a fall in aggregate output, from Y1to Y2.-Keynesian economics reflected two main innovations:-Keynes emphasized the short-run effects of shifts in aggregate demand onaggregate output, rather than the long-run determination of the aggregate price-Factors besides money supply affected the shifts of the AD curve (businessconfidence)Policy to Fight Recessions
Justin Sousa 2December 7, 2016-The main practical consequence of Keynes’ work was that it legitimizedmacroeconomicpolicy activism, the us of monetary and fiscal policy to smooth out the business cycleThe Revival of the Monetary Policy-The termliquidity trap, was developed through Keynes’ idea that monetary policy wouldbe useless in times of near 0% interest rates-Monetary went into a short retirement from assisting in economic management when theinterest rate remained close to 0% even after WWII-Milton Friedman and Anna Schwartz, however, reinstated the use of the monetarypolicy after showing how preventions that the Fed should have taken to combatthe monetary constriction would have helped avoided the Great Depression-