Marcro micro econmiy david begg chapter 032

Chapter 32 Macroeconomics: where we stand? David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith Macroeconomics in perspective There is a spectrum of views about the macroeconomy – especially with regard to – market clearing – expectations formation – speed of adjustment 32.2 Market clearing The question of whether all markets clear is critical in macroeconomics In a Classical view of the world, all markets clear – so the economy is at full employment and at potential output In a Keynesian world, markets not clear (especially the labour market) – and there is more scope for the government to influence the macroeconomy 32.3 Expectations formation Beliefs about the future shape today’s decisions – but how people form expectations about the future? Exogenous expectations – not explained within the model Extrapolative expectations – assumes that the future will be similar to the recent past Rational expectations – assumes that on average people guess the future correctly 32.4 Points along the macro spectrum New Classical macroeconomics – – instantaneous market clearing rational expectations Gradualist monetarists – – full employment will be restored within a few years the main effect of higher money is higher prices Moderate Keynesians – – economy will eventually get back to full employment but wage and price adjustment is fairly sluggish Extreme Keynesians – – markets fail to clear in the short run and fail to clear even in the long run 32.5 A stylized view of the competing views New Classical Market clearing Expectations Long run/ short run Very fast Rational – adjust quickly Not much difference Full employment Always close Hysteresis No problem Policy conclusion Demand management useless; need supply-side Gradualist monetarist Moderate Keynesian Extreme Keynesian Quite fast Quite slow Very slow Adjust more slowly Could be fast or Adjust slow to adjust slowly Long run more Don’t neglect Short run short run important v important Never too far away No problem Could be far away Could stay away Might be big problem Not a big problem Supply-side Demand more important; management avoid wild swings important in demand too 32.6 Demand management is what counts