notes - Notes for Econ 1021 Roger E. A. Farmer October 27,...

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Notes for Econ 102 1 Roger E. A. Farmer October 27, 2008 1 c ° Roger E A Farmer, Los Angeles 2008. These notes may not be distributed without permission.
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ii
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Contents 1 The Phillips Curve 1 1 .1 K eyn e s ’Th eo ryo fP r i c e s..................... 1 1 .2 Th ePh i l l ip sCu rv e ........................ 2 1 .3 Th eRa t iona lExp e c ta t ion sR ev o lu t ion . ............ 5 1 .4 Bu s in e s sCy c
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iv CONTENTS
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Chapter 1 The Phillips Curve I studied economics as an undergraduate in England. When I graduated in the late 1970s Keynesian economics was still widely taught to undergradu- ate and graduate students as the theory of business cycles. By the time I completed my Ph.D. in Canada in the early 1980s Keynesian economics was quickly disappearing from the curriculum at major universities in the UK, Canada and the United States. This chapter explains why. 1.1 Keynes’ Theory of Prices In Chapter 21 of the General Theory Keynes explained his theory of the gen- eral level of prices. In it, he argued that if households and f rms demand more goods then more people will be employed to produce those goods until the economy is operating at full employment. Full employment acts as a capacity constraint and, once reached, additional increases in aggregate demand will cause wages and prices to rise but there will be no further increases in output or employment. Keynes provided a detailed theory of the determinants of aggregate de- mand that has survived the test of time and is not very di f erent from the theories that we teach to graduate students today. According to this the- ory, at lower price levels households and f rms are willing to spend more on goods and services and to save less for the future. He explained how changes in monetary and f scal policy cause changes in aggregate demand and his theory of aggregate supply explained how demand changes were translated into increased output or higher prices. Keynes explained that, if the Fed 1
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2 CHAPTER 1. THE PHILLIPS CURVE lowers the interest rate, aggregate demand will increase because investors are more willing to build additional machines and factories. If the govern- ment raises the tax rate - aggregate demand will decrease because households andbus
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This note was uploaded on 06/30/2009 for the course ECON 102 taught by Professor Serra during the Fall '08 term at UCLA.

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notes - Notes for Econ 1021 Roger E. A. Farmer October 27,...

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