{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

macsg18 - 18[33 Debates in Macroeconomics Monetarism New...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
459 18 [33] Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics C hapter objectives: 1. Outline the assumptions of the quantity theory and discuss the rationale for policy actions advised by monetarists that distinguish them from Keynesians. 2. State the assumptions of the new classical macroeconomic theory, especially the role of expectations, and describe the model’s policy conclusions. Outline the reasoning behind the real business cycle theory. 3. Outline the reasoning behind (and summarize the evidence about) the supply-side policies that found prominence in the 1980s. This chapter exposes some of the controversies that have boiled up within macroeconomics. It should alert you to the fact that no single model is accepted by all economists. Economics, unlike the physical sciences, is not governed by a set of undeniable laws. The model that is preferred often has as much to do with the prevailing philosophical attitude as it does with tested theories. A political dimension may be detected too. The activist “demand-side” Keynesian view is fairly liberal; Milton Friedman, the most famous monetarist, attracted the attention of Presidents Nixon and Ford; the supply-side theory was a major plank of Ronald Reagan’s presidential campaign in 1980; and the new classical economics advocates a “hands-off” approach to government intervention in the economy. B RAIN T EASER : The Lucas supply function, which is discussed in this chapter, argues that if inflation is higher than expected, the economy’s output will increase. You expect 5% inflation and negotiate a 5% wage increase. What happens to your real wage if inflation actually runs at 10%? What happens to your employer’s real wage bill? What would firms have an incentive to do in such a case? How would output be affected?
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon