420+-+3.0+-+Intro+to+Keynesian_Student - Econ 420 Intermediate Theory Money Income Employment Prof Aguilar Econ420 | Prof Aguilar 1 Section 3 Keynesian

420+-+3.0+-+Intro+to+Keynesian_Student - Econ 420...

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Econ420 | Prof. Aguilar Econ 420 Intermediate Theory: Money, Income, & Employment Prof. Aguilar 1
Econ420 | Prof. Aguilar 3.0 –Keynesian Theory Section 3 –Keynesian Theory 3.2 – Aggregate Demand 3.3 – Aggregate Supply By the end of this section you will be able to : motivate the need for an alternative to Classical thought describe the main characteristics of the Great Depression 3.4 – Equilibrium 3.1 – Introduction via the Great Depression 2
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 3 Mercantilism (1500-1600) Bullionism Government Intervention Classical Theory (1770’s -1930’s) Money is a Veil Free Markets
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 4 0 2 4 6 8 10 12 Unemployment Rate (%)
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 5 0 2 4 6 8 10 12 Real GDP (y/y% change)
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Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 7
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 8
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 9
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 10
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 11
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 12
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 13 Policy Action in the U.S. President Hoover raises taxes in 1932 Reason: Balance the Budget Presidential candidate Franklin Roosevelt argued for cuts in government spending. Reason: Balance the Budget Presidential advisor Bernard Baruch summarized: Balance the budgets, stop spending money we haven’t got. Sacrifice for frugality and revenue. Cut government spending – cut it as rations in a siege. Tax – tax everybody for everything.
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 14 Mercantilism (1500-1600) Bullionism Government Intervention Classical Theory (1770’s -1930’s) Money is a Veil Free Markets Keynesian Theory (1930’s – 1970’s ) Sticky prices Government intervention for aggregate demand
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 15 Explaining Great Depression in Classical Model i) Demand Side P Y AS AD1 QTM: Money supply decreases which lowers the price level. Prices dropped during the depression, but the magnitude of the drop in P not warranted from drop in M, and that doesn not explain the drop in demand.
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 16 Explaining Great Depression in Classical Model ii) Supply Side P Y AS1 AD1 …the predicted increas e in prices runs contrary to eveidence. A drop in labor is consistent with a drop in output, but why did employment drop in the first place?, and
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 17 Explaining Great Depression in Classical Model iii) Supply & Demand P AS1 AD1 Simultaneous supply and demand shocks are consistent with the direction of movements in Y&P, but that still doesn’t explain WHY labor contracted.
Econ420 | Prof. Aguilar Section 3 –Keynesian Theory 18 Keynes’ Rebut to Classical Model Prices may not be perfectly flexible.

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