Chapter 10-11 Keynesian vs Classical on Economic Instability (2)

Chapter 10-11 Keynesian vs Classical on Economic Instability (2)

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Economic instability Keynesians vs classicals Chapter 10, 11
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Steady Growth (with sound money) [See pp 220-2 + Exh 4] P Real GDP $100B $150B Y 1870 Y 1900 100.0 110.0 AD In time, greater production possibilities through Capital formation (savings) Technological improvements Institutional efficiency Real output increases with slowly falling prices due to higher productivity and stable money . Real and/or nominal wages rise due to higher productivity and falling prices (cost of living ). Nominal interest rates lower due to expected lower price level (negative inflationary premium) . SRAS LRAS 1 2 A real possibility
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Booms and Busts P Real GDP Y F P1 P2 AD LRAS SRAS P3 Boom Bust Boom reflects artificial surge in economic activity followed by a bust or recession (see graphics)
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Keynes and the Great Depression The US economy has historically grown at an annual rate of about 3%, which has greatly improved the living standards of Americans. However, growth has been uneven. The US and other market economies have experienced economic fluctuations or business cycles, where periods of robust expansion are followed by a contraction. If output shrinks for an extended period, then the contraction is called a recession or depression. Most notable here was the “Roaring 20s” followed by the 1929 stock market crash and the “Great Depression” of the 1930s. Generally, cycles normally last one to two years from peak to trough (see exhibit 9, p. 230 or Business Cycles.pdf ). However, unemployment remained high throughout the 1930s and the stock market never recovered from 1929 levels until 1954. This crisis gave birth to Macroeconomics beginning with the 1936 publication of John Maynard Keynes (pronounced canes). Keynesian economics remained dominant until “stagflation” of the 1970s.
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Myths about the Great Depression 1. Herbert Hoover, elected in 1928, was a hands-off, free-market president. Hoover was a big believer in government intervention and an incessant government activist. Hoover raised taxes on the wealthy in the face of a downturn and piled up deficits for public works. Hoover signed the Smoot-Hawley Tariff Act in 1930 which predictably reduced the benefits of foreign trade. http://online.wsj.com/article/SB12257607756949554 5.html
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FDR’s New Deal of the 1930’s A strong anti-capitalism sentiment existed in academia, media, and Hollywood. The seemingly significant advances made by the Soviet Union were lauded by the intellectuals. Populism, pragmatism, and progressivism meant that you were willing to try state activism even though it meant violating individual rights. Despite signs of recovering, FDR enacted the 1934 NRA (National Recovery Administration).
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Keynesian focus on spending creates concerns for “leakages” “Because spending is perceived to drive a capitalist system , withdrawals (leakages) tend to stifle income creation.” Since C makes up the bulk of spending, C
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This note was uploaded on 04/01/2012 for the course ECON 101 taught by Professor Balaban during the Fall '07 term at UNC.

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Chapter 10-11 Keynesian vs Classical on Economic Instability (2)

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