CHAPTER 22 DISPUTES OVER MACRO THEORY AND POLICY.pdf -...

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CHAPTER 22 DISPUTES OVER MACRO THEORY AND POLICY CLASSICAL VIEW KEYNESIAN VIEW the macroeconomic generalisations accepted by most economists before the 1930s that led to the conclusion that a capitalistic economy was self-regulating and therefore would usually employ its resources fully the macroeconomic generalisations that lead to the conclusion that a capitalist economy is characterised by macroeconomic instability and that the fiscal policy and monetary policy can be used to promote full-employment, price- level stability and economic growth vertical aggregate supply curve at the full- employment level of real output stable aggregate demand curve as long as money supply is constant horizontal aggregate supply curve up until full-employment of real output and then it beocmes vertical unstable aggreagte demand curve due to the volatility of investment spending which causes either recession or demand-pull inflation WHAT CAUSES MACRO INSTABILITY? MAINSTREAM VIEW Mainstream economists say that macroeconomic instability steam from: (1) CHANGES IN INVESTMENT SPENDING which changes aggregate demand C + I + Xn + G = GDP (2) ADVERSE AGGREGATE SUPPLY SHOCKS which changes aggregate supply MONETARIST VIEW MONETARISM refers to the macroeconomic view that the main cause of changes in aggregate output and price level is fluctuations in the money supply.

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