AP Economics Mr. Bernstein Module 35: History and Alternative Views of Macroeconomics March 23, 2015

AP Economics Mr. Bernstein History and Alternative Views of Macroeconomics Objectives - Understand each of the following: Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression How Keynes and the experience of the Great Depression legitimized macroeconomic policy activism What monetarism is and its views about the limits of monetary policy How challenges led to a revision of Keynesian ideas and the emergence of the new classical macroeconomics 2

AP Economics Mr. Bernstein Classical Economics: Money and the Price Level According to Classical Model, Prices are flexible, Agg. Supply is vertical even in short run, and an %  MS = %  PL…but  MS did not affect Y Focus was on Long-Term Keynes: “In the Long Run we are all dead” Durden: …………. 3

AP Economics Mr. Bernstein The Great Depression Markets did not self-correct adequately, or in an adequate timeframe Classical Theory failed to predict or fix the Depression In 1936 Keynes presented The General Theory of Employment, Interest, and Money Short-run shifts in AD were important and not temporary Changes in “Animal Spirits” or Confidence causes shifts in AD and drove the business cycle, not MS shifts 4

AP Economics Mr. Bernstein Keynes’ Theory Classical Theory Keynesian Theory Legitimized use of active fiscal and monetary policy 5

AP Economics Mr. Bernstein The Revival of Monetary Policy Milton Friedman, 1963: A Monetary History of the United States, 1867 – 1960 MS fell sharply during Depression Monetary Policy was primary Not subject to politics Monetarism Steady MS growth = steady GDP growth Natural Rate of Unemployment exists 6

AP Economics Mr. Bernstein Keynesian Economics and the Political Cycle Expansionary policy has been found to be correlated with Election cycles, not business cycles Response to 2008 Financial Crisis: “Stimulus Package” was timed to maximize impact in 2012… “Never Let a Good Crisis Go To Waste” Rahm Emauel, President Obama’s Chief of Staff, Nov Fiscal policy goals: get elected, deal with  later Further justifies independence of Fed 7