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Unformatted text preview: Disputes over Macro Theory and Policy CHAPTER NINETEEN DISPUTES OVER MACRO THEORY AND POLICY CHAPTER OVERVIEW One of the great traditions in scholarship is the challenge to mainstream thinking. Many such challenges to the conventional wisdom fail; either the new theories are not logical or they dont conform to the facts. At the opposite extreme, some new theories gain full support and replace the existing theories. More often, the new ideas modify mainstream thinking, which thereafter is improved or extended. This is true in economics. In this chapter we examine some of the major disputes in macro theory and policy. We initially provide historical background by contrasting classical and Keynesian macroeconomic theories. Then we turn to contemporary disagreements on three interrelated questions: (1) What causes instability in the economy? (2) Is the economy self-correcting? (3) Should government adhere to rules or use discretion in setting economic policy? WHATS NEW Except for some revisions and updates, this chapter is largely unchanged. Discussion of the vertical classical aggregate supply curve is consolidated, as much of it appears now in Chapter 11. The fading of the call for a Friedman monetary rule and the new call for inflation targeting are discussed. A Consider This box has been added, using the Lerner-Friedman steering wheel analogy to illustrate the rules versus discretion debate. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to 1. Contrast the classical and Keynesian views of the aggregate supply curve. 2. Compare the classical and Keynesian views of the stability of the aggregate demand curve. 3. Give two reasons for macroeconomic instability according to mainstream economists. 4. Explain the equation of exchange. 5. Identify the single most important cause of macroeconomic instability according to the monetarists. 6. Explain the main reasons for macroeconomic instability according to the real-business-cycle theory. 7. Construct an example to demonstrate a coordination failure. 8. Explain the view of self-correction held by mainstream economists. 9. List three reasons why a higher wage could result in greater efficiency. 10. Explain how insider-outsider relationships contribute to downward wage inflexibility. 11. Describe the monetary rule and explain why monetarists prefer it to discretionary monetary policy. 5 Disputes over Macro Theory and Policy 12. Compare the views of mainstream economists with monetarists and RET economists regarding the use of discretionary fiscal policy and the need for an annually balanced budget. 13. Compare and contrast the Taylor Rule with the Monetary Rule advocated by monetarists....
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This note was uploaded on 07/12/2011 for the course IS 301 taught by Professor Aleiss during the Spring '08 term at CSU Long Beach.
- Spring '08