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