Handout_2_8-21-2011(1) - Classical Macroeconomics(chapters 3 4 in R Froyen 9ed Chapter 3 Equilibrium Output and Employment Keynesian Theory A Timeline

Handout_2_8-21-2011(1) - Classical Macroeconomics(chapters...

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Classical Macroeconomics (chapters 3 & 4 in R. Froyen, 9ed) Chapter 3 “… Equilibrium Output and Employment” A Timeline of Economic Theory Mid 1930s Mid 1970s ... Classical Theory Keynesian Theory Monetarist Theory …. Classical Theory Keynesian Theory 1. Keynesians take issue with the stability assumption and argue that markets are not stable because of frictions that restrict price movements (e.g. wage rigidity in labor market). 2. Economic agents’ expectations are backward- looking because the expectation of a variable such as the price level adjusts (slowly) to the past behavior of the variable. 3. Differentiate between micro and macro economics. 4. Implication for the policy: During the recessions various stimulative demand policies may be useful. These include: a. Increasing government expenditures (G), b. Decreasing taxes (T), c. Decreasing interest rate (r). 3

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