week 3 Flashcards
equilibrium
imports=exports
savings=investments
fiscal perspective of equilibrium
taxes=government spending
withdrawals=injections
market for loanable funds
describes how that borrowing happens. The supply of loanable funds is based on savings. The demand for loanable funds is based on borrowing.
markets clear
market for loanable funds
market for labour
market for M & X- gold standard
quantity theory of money
greater quantity of money, higher levels of prices. under this theory inflation us simply caused by rise in money supply
equation of exchange MV=PY
velocity of circulation with V (velocity) and Y (real GDP) constant P=f(M). Both V and Y were determined independently of the money supply
Great Depression and return to gold standard
the depression of 1920s and 30s
Great Depression and treasury’s rejection of public works
if funded by taxation, would have decreased consumption
if funded by printing money, the fear of inflation
if funded by borrowing, the problem of crowding out
keynesian revolution
keynes rejection of classical theory. identified two crucial markets in which disequilibrium could persist
two markets
Labour market
market for loanable funds
the labour market
- workers would resist wage cuts. wages were thus ‘sticky’ downwards. In a recession, when the demand for the labour is low, wages might not fall far or fast enough to clear the labour market.
- workers are also consumers. even if wage cuts could be introduced, as advocated by classical economists, Keynes rejected that as the solution to demand deficiency
the markets for loanable funds
- an increase in supply of loanable funds will lead to the real rate of interest for loanable funds falling. But an increase in savings also means a fall in consumption
- rejection of simple quantity theory
- rejection of a balanced budget- rejection of says law and argued it was demand that created supply
Keynes central point
an unregulated market economy could not ensure sufficient demand. Governments should abandon laissez-faire policies and intervene to control aggregate demand
Say’s law
supply does create its own demand and thus ensuring full employment
Keynes analysis of employment and inflation
the importance of aggregate demand
the multiplier process
Keynes policy recommendations
demand management by fiscal and monetary policies
Keynesian policies
in 1950s and 60s
-economic fluctuations still existed
-neglect of structural problems
-breakdown of the simple Phillips curve
-focus on aggregate demand
monetarist and new classical schools
both schools- different from Keynesian orthodoxy.
both believe that the market economy can deliver macroeconomic stability
government intervention, they argued, can be a contributory factor to macroeconomic instability
monetarists
inflation creates uncertainty for business people and so reduces investment while also reducing s country’s competitiveness in international trade. essential for governments to keep tight control over money supply and advocated the setting of money supply targets
monetarist counter-revolution
-restatement of quantity theory
-rejection of Keynesian demand management policies
-the problem of inflationary expectations
-a vertical long-run Phillips curve
monetarists version of long Phillips curve
The long-run Phillips curve is vertical at the natural rate of unemployment. if unemployment reduced, shift left.
reduce natural rate
supply side policies needed. policies that focus on increasing potential output by increasing the quantity and/or productivity of factors of production
new classical school
continuous market clearing
rational expectations
implications of previous HP
a change in aggregate demand will simply cause a change in p (not a change in output and employment
monetarist and new classical schools
The rise of monetarist and new classical macroeconomics was to be reflected in economic policy during the 1980s in many countries, though particularly so in the USA and the UK.
Price rigidity
aggregate demand can have significant effects on an economy output . with frictions to market adjustment, governments may need to intervene to affect the level of ad
Hysteresis
low capital stock
deskilling
insiders and outsiders
impact on NAIRU
NAIRU
non accelerating interest rate of unemployment
DSGE
dynamic sycastic general economic
fiscal expansion to fiscal austerity
initial expansionary policies
the move to austerity
debates over policy and deficit reduction
paradox of thrift
save, aggregate demand down, national income down, overall saving down
paradox of debt
save to pay debt, aggregate demand down, deflation, real cost of debt rise, save even more
global financial crisis
officially began in us, December 2007. origin traced back to low interest rate environment
