Chapter 10

Chapter 10 - Chapter 10 - Keynesian Foundations of Modern...

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

View Full Document Right Arrow Icon
Chapter 10 - Keynesian Foundations of Modern Macroeconomics From the time of Adam Smith (1776) until the Great Depression of the 1930s, almost all economists were Classical economists - they believed that the self- correcting mechanisms of a market economy would continually guide the economy toward full output/full employment. Market prices would adjust to restore the economy to full employment. For example, in a recession or econ contraction, wages, prices and interest rates would fall and would eventually stimulate the economy back to full output. There was little role for government in the classical model and in practice - Fed spending was only 3% of national income. During the 1930s we experienced the Great Depression, the stock market crash, bank failures, a decade of unemployment averaging about 20% (high of 25% in 1933, see page 402). Great Depression was a worldwide phenomenon. Debate: Did the self-correcting mechanism of the market economy fail? or Did the fiscal and monetary policies of Congress and the FRS fail? Congress raised taxes and imposed tariffs (taxes) during a recession, and the FRS contracted the MS by 1/3 - Great Contraction. Debate continues: Activist policy vs. Non-activist Passive policy Neoclassical revival - favor non-interventionist, passive approach for policy, favor policy rules vs discretionary policies, like balanced budgets and fixed growth rate for MS. Activist approach will de-stabilize the economy. Traditional, Keynesian approach - Activist approach for policy. Gov and FRS should play an active role in attempting to stabilize the economy by "fine- tuning." Discretionary approach to fine-tuning. Figure out what's wrong and try to fix it. Counter-cyclical approach. Rules vs. Discretion Debate continues. Active vs. passive approach. Debate centers on: 1) the ability and speed of the economy to self-correct and 2) the ability and speed of policymakers to fine-tune the economy.
Background image of page 1

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

View Full DocumentRight Arrow Icon
The Great Depression challenged the Classical approach and led to a forty year period where the Classical approach lost favor and we saw the emergence of a new approach, called Keynesian, based on a British economist named John Maynard Keynes. Keynes challenged the self-correcting nature of the market economy. Favored active
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/18/2011 for the course ECON 101 taught by Professor Gottlieb during the Fall '08 term at Rutgers.

Page1 / 5

Chapter 10 - Chapter 10 - Keynesian Foundations of Modern...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online