Disputes In Macro Theory Flashcards
What are the main views of classical theorists?
The economy is self correcting and there are downward flexible wages and prices
What are the views of monetarists?
They focus on money supply, they believe the market is highly competitive, and that competition gives the market stability
What are the beliefs of classical theorists on wages and prices?
They are downward flexible
What do classical theorists believe about gov intervention in the economy??
They believe in laissez afire economics
What do classical theorists believe is the problem with the economy?
Government intervention using discretionary fiscal policy
What is the policy rule?
It prevents the government from managing AD
What is this the monetary rule?
The FED expands the money supply at a fixed rate each year
What do classical theorists believe about a balanced budget?
Pro-balanced budget
Who supports the monetary and policy rule?
Classical theorists
Classics theorists believe that if wages aren’t downward flexible it’s the governemnt’sfault because of?
Minimum wage laws, pro Union legislation, pro monopoly legislation, discretionary fiscal policy, and social programs
In a classical theory graph AS is
Vertically sloped
In a classical theory graph AD is not
Downward sloping
In classical theory a decrease is AD doesn’t change output only changes
Price level
What are the main beliefs in Keynesian theory?
The economy isn’t self correcting and the economy can get stuck in period of underspending indefinitely
What do Keynesian theorists believe can fix the economy?
The givenerment using fiscal and monetary policy
What do Keynesian theorists believe about prices and wages?
They are downward inflexible
What do Keynesianism believe cause economic instability ?
Changes in investment spending and supply shocks
Are Keynesian theorists for or against the policy and monetary rule?
Against
Are Keynesianism for or against a balanced budget?
Against
In a Keynesian theory graph AS is
Horizontal up to a point and then it’s vertical
In a Keynesian graph AD
Is down sloping
In Keynesian theory a decrease in AD causes no change in price level, and
A decrease I output
For classical viewers what caused instability of AD?
Wars, droughts, panics, and gold rushes
According to Keynesian viewers instability comes with changes in Investment spending which causes
Demand pull inflation
According to Keynesian viewers changes in the money supply cause instability which causes
Cost push inflation
Keynesian view is also called?
Mainstream view
What is the equation of exchange?
MV=PQ
What does MV mean?
The nations money supply times the # of times spent
What is PQ?
Nominal GDP
MV represents the
Total amount spent
PQ represents the
Total amount received by sellers
What is M?
The supply of money
What is V?
Velocity; the # of times the average dollar is spent in a year
What is Q?
The amount of g/s purchased
What is P?
Price level
What does the equation do exchange mean?
The dollar value of total spending must equal the dollar value of total output
What do rational expectation theorists believe?
Unanticipated PL changes cause changes in GDP in the short run but not the long run, and that people anticipated PL changes and act appropriately so no real change in GDP occurs
What do Keynesian theorists believe about downward inflexible wages?
They a re caused by wage contracts and minimum wages laws; firms don’t want to lower wages and risk low morale or losing skilled workers
What doe Keynesian theorists believe about efficient wage theory?
The Benefits of paying higher wages ar greater work effort, lower supervision costs, and reduced loss of skilled workers
What do Keynesian theorists believe about insider-outsider relationships?
They keep wages up
What is an insider outsider relationship?
Insiders=those who are contracted and won’t lose job
Outsiders= those who lose job during times of recession
What are the two assumptions of rational expectation theory?
People have adequate info to predict outcomes and behave rationally; and the economy is competitive, and prices and wages are flexible both up and down
What does the real business cycle suggest?
Macro instability is caused by real factors that affect AS; and that business fluctuations result from significant changes in technology and resource availability
What do Keynesians think of the private economy?
It is potentially unstable
What do Keynesians believe cause instability?
Changes in AD and AS shocks
What do Keynesians believe is appropriate macro policy?
Fiscal and monetary policy
What do Keynesians believe about the velocity of money?
It is unstable
What do monetarists believe about the private economy?
It is stable in the long run at Qf
What do monetarists believe about the cause of instability?
Inappropriate monetary policy
What do monetarists believe is appropriate macro policy?
Monetary rule
What do monetarists believe about the velocity of money?
It is stable
What do RETs believe about the private economy?
It is stable in the long run at Qf
What do RETs believe is the cause of instability?
Unanticipated AD and AS shocks in the short run
What do RETs think is appropriate macro policy?
Monetary rule
What do supply siders think about the private economy?
It may stagnate without work, savings, and investment incentives
What do supply siders think is the cause of instability?
Changes is AS
What do supply siders view as appropriate macro policy?
Policy to increase AS
Who are supporters of classical theory?
Monetarists, Rational Expectation Theorists, and Supply riders
