1. What is a liquidity trap?
What is the difference between debt deflation, disinflation and deflation?

2. Liquidity Trap
When interest rates reach 0%, lenders quit lending. Because the FED can’t lower interest rates any lower than 0%, monetary policy becomes ineffective. This is the liquidity trap
Debt deflation is the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation
Disinflation: the process of lowering inflation

3. Module 35 and 36 History and Alternative Views of Macroeconomics

4. Quantity Theory of Money

5. Classical versus Keynesian Macroeconomics
Section 6 | Module 35

6. Wide gaps in economic debate of the 20th century are narrowing
Wide gaps in economic debate of the 20th century are narrowing. There are a few concepts that share broad acceptance across macroeconomics.
1. Most economists agree that monetary policy is usually preferred to discretionary fiscal policy to reverse the effects of a recession.

7. Is Expansionary Monetary Policy Helpful in Fighting Recessions?
Classical economists didn’t believe that monetary policy would reverse a recession.
Keynesians thought it could have limited effectiveness.
Friedman convinced economists that monetary policy is effective
Now all macroeconomists now agree that monetary policy can be used to shift the aggregate demand curve to reduce economic instability.
Now most economists don’t follow the old classical or old Keynesian philosophies.
Now –it is generally agreed that monetary policy is ineffective only in the case of a liquidity trap

8. Is Expansionary Fiscal Policy Effective in Fighting Recessions?
Classical Macroeconomists were even more opposed to fiscal expansion than monetary expansion.
Keynesians gave fiscal policy a central role in fighting recessions
Monetarists argued that fiscal policy was ineffective as long as the money supply was held constant.
TODAY-Most macroeconomists agree that fiscal policy like monetary policy can shift the aggregate demand curve
Most agree that the federal government should not seek to balance the budget regardless of the state of the economy; the role of the budget as an automatic stabilizer helps keep the economy on an even keel

9. Can Monetary or Fiscal Policy reduce unemployment in the Long-run?
Most macroeconomists now accept the Natural rate hypothesis and agree on the limitation of monetary and fiscal policy
They believe that both policies can limit the size of fluctuations of the actual unemployment rate around the natural rate but can’t keep unemployment below the natural rate

10. Should Fiscal Policy be used in a Discretionary way?
Many but not all, economists believe that discretionary fiscal policy is usually counterproductive due to the lags in adjusting fiscal policy that can end up making things worse or do the opposite of what they intended.
As a result monetary policy is touted as the lead role in economic stabilization.

11. Mr. Clifford and Keynes https://www.youtube.com/watch?v=xKGtmzLP8gw
What is Austrian Economics?

12. Should Monetary Policy be used in a Discretionary Way?
Monetary policy should play a main role in stabilization policy
Central bank should be independent, insulated from political pressures, in order to avoid a political business cycle.
Discretionary fiscal policy should be used sparingly, both because of policy lags and the risks of a political business cycle.

13. Last and not least
The Federal Reserve does not announce a target rate of inflation but its actions are consistent with a target of about 2%
Should the FED be in
The business of managing the Stock
Market? Most economist say NO!
Unconventional Monetary Policy: In
the wake of the 2008 financial crisis
the FED used some steps outside the box.

14. Supply Side Economics Popular in the 80 and early 90’s
Thatcher and Reagan incorporated ideas into their fiscal policy.
Supply Side Economics advocates for the production side of the market.
Infrastructure spending
Education spending
Lower Corporate and individual taxes– Laffer Curve
Less Union influence
Deregulation
Free Trade- no barriers

15. Supply Side Policies of Economics /

16. Natural Rate hypothesis
To avoid accelerating inflation over time- the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate.
Limits the role of activist macroeconomic policy.

17. Rational Expectations Theory
Instability in the economy is caused by unanticipated AD or AS shocks in the short run
Monetary or fiscal policy will have no effect on output because rational consumers will build changes into their expectations.
Individuals and firms make decisions optimally using all available information

18. Real Business Cycle Theory
Aggregate supply curve is vertical, so AS shocks change the business cycle.
A recession occurs when a slowdown in productivity growth shifts the aggregate supply curve leftward.
A recovery occurs when a pick up in productivity growth shifts the aggregate supply curve rightward.