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econ434notes32

econ434notes32 - History of Economic Doctrines Lecture 33...

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History of Economic Doctrines Lecture 33 Keynesian Economics and the Economics of Keynes John Maynard Keynes and the Great Depression [ Keynes Bio Link ] -Monetarists’ vs. Keynesians Monetarists: Keynesians AD depends on money supply AD = C+I+G+X-M Keynes Belief: -An Increase in aggregate demand at full employment led to an increase in the price level. -Also that a decrease in aggregate demand would lead to a quantity adjustment in which producers decreased production (Keynes thought that, in a recession, people would only produce if they thought that someone would buy the goods that they produced.) -Demand creates its own Supply\ Neoclassical Macro v. Keynesian Theory Neoclassical The market is a machine that generates “the best of all possible worlds.” [to quote Dr. Pangloss, from Voltaire’s Candide .] - Assumes flexible w, i , p and Say’s Law -- yields full employment - AD just determines price levels -- price levels determined by the money supply: M/ M P/ P Keynes - Neoclassical paradigm is not valid in the SR when AD falls because of sticky wages and prices Quantity Adjustments Similar Debates Price Adjustments to Disequilibria Quantity Adjustments to Disequilibria Joseph Bertrand duopoly model Cournot duopoly model
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Leon Walras’ “tátonnemènt equilibration Alfred Marshall partial equilibrium models Classical/neoclassical macroeconomics John Maynard Keynes .- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - English classical : Supply Prices [labour theory] Austrian: Demand Prices [subjective] -Keynesian Theory Keynes thought that a capitalist economy would experience high unemployment as a long term situation unless some external forces were used to reduce it. He believed that this external force must come from government and should take the form of large expenditures on public works projects capable of utilizing and mobilizing willing workers who are unemployed. Keynes did not believe in the long tradition of “laissez-faire’ policies, which strongly discourage government intervention in the economy. 1. Keynesian theory accepts the classical and neoclassical theory that flexible wages, interest rates and prices, combined with Say’s Law, ensure full employment and a maximum value for output in the long run. But Keynes famously wrote, “but in the long run we are all dead.” 2. Keynesian theory concludes that, in the depths of a deep depression or recession, “demand creates its own supply.” This is in contrast to Say’s Law, with states that “supply creates its own demand.” 3. Keynesian Aggregate Expenditures are the sum of: C+I+G+ (X-M) as these planned spending relate to income 4. Keynesian theory suggests that, during severe depressions, excessive unemployment can be
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