Manual Learning basic macroeconomics : a policy perspective from different schools of thought

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Table of contents

This book teaches business leaders, managers, policy makers, and others who haven't been formally trained in labor economics to understand this discipline.

  • Module description.
  • The Classical School and the Great Depression.
  • The Classical School and the Great Depression;
  • The Leibniz-Des Bosses Correspondence.

By incorporating clear graphs and non-technical language, the book explores various government policy decisions made on behalf of labor and the consequences of those decisions. The book begins with an accessible, concise, and thorough development of labor supply and demand. The book then explores the tradeoff s between the economic efficiency of free markets and government equity interventions including anti-poverty policy, migration, unionization, discrimination, and education.

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Macroeconomics 4th Edition. Buffett The Making of an American Capitalist. Macroeconomics 3rd edition, Money Vintage Minis. Instant Cashflow Instant Success. Principles Of Macroeconomics. Facing Reality, Claiming Leadership, Restoring The intersection of the curves identifies an aggregate equilibrium in the economy [50] where there are unique equilibrium values for interest rates and economic output.

A decrease in money supply would lead to higher interest rates, which reduce investment and thereby lower output throughout the economy. Notably, in , Franco Modigliani [b] added a labor market. Modigliani's model represented the economy as a system with general equilibrium across the interconnected markets for labor, finance, and goods, [47] and it explained unemployment with rigid nominal wages. Growth had been of interest to 18th-century classical economists like Adam Smith , but work tapered off during the 19th and early 20th century marginalist revolution when researchers focused on microeconomics.

Economists incorporated the theoretical work from the synthesis into large-scale macroeconometric models that combined individual equations for factors such as consumption, investment, and money demand [61] with empirically observed data.

Learning Basic Macroeconomics

Keynes did not lay out an explicit theory of price level. Phillips [e] set the basis for a price level theory when he made the empirical observation that inflation and unemployment seemed to be inversely related. In Richard Lipsey [f] provided the first theoretical explanation of this correlation. Generally Keynesian explanations of the curve held that excess demand drove high inflation and low unemployment while an output gap raised unemployment and depressed prices.

The presumed trade-off between output and inflation represented by the curve was the weakest part of the Keynesian system. Despite its prevalence, the neoclassical synthesis had its Keynesian critics.

After Keynesian Macroeconomics

A strain of disequilibrium or "non-Walrasian" theory developed [70] that criticized the synthesis for apparent contradictions in allowing disequilibrium phenomena, especially involuntary unemployment , to be modeled in equilibrium models. Many see Don Patinkin 's work as the first in the disequilibrium vein. Clower [g] introduced his "dual-decision hypothesis" that a person in a market may determine what he wants to buy, but is ultimately limited in how much he can buy based on how much he can sell.

These markets produced "false prices" resulting in disequilibrium. While American economists quickly abandoned disequilibrium models, European economists were more open to models without market clearing. In Malinvaud's theory, reaching the Walrasian equilibrium case is almost impossible to achieve given the nature of industrial pricing. Milton Friedman developed an alternative to Keynesian macroeconomics eventually labeled monetarism. Generally monetarism is the idea that the supply of money matters for the macroeconomy. The Phillips curve appeared to reflect a clear, inverse relationship between inflation and output.

The curve broke down in the s as economies suffered simultaneous economic stagnation and inflation known as stagflation. The empirical implosion of the Phillips curve followed attacks mounted on theoretical grounds by Friedman and Edmund Phelps. Phelps, although not a monetarist, argued that only unexpected inflation or deflation impacted employment.

Variations of Phelps's "expectations-augmented Phillips curve" became standard tools. Friedman and Phelps used models with no long-run trade-off between inflation and unemployment.

What Is Keynesian Economics? - Back to Basics - Finance & Development, September

Instead of the Phillips curve they used models based on the natural rate of unemployment where expansionary monetary policy can only temporarily shift unemployment below the natural rate. Eventually, firms will adjust their prices and wages for inflation based on real factors, ignoring nominal changes from monetary policy. The expansionary boost will be wiped out. Anna Schwartz collaborated with Friedman to produce one of monetarism's major works, A Monetary History of the United States , which linked money supply to the business cycle. In real terms, monetary policy had effectively been contractionary, putting downward pressure on output and employment, even though economists looking only at nominal rates thought monetary policy had been stimulative.

Friedman developed his own quantity theory of money that referred to Irving Fisher 's but inherited much from Keynes. They found money demand to be stable even during fiscal policy shifts, [92] and both fiscal and monetary policies suffer from lags that made them too slow to prevent mild downturns. Monetarism attracted the attention of policy makers in the lates and s. Friedman and Phelps's version of the Phillips curve performed better during stagflation and gave monetarism a boost in credibility.

Volcker tightened the money supply and brought inflation down, creating a severe recession in the process. The recession lessened monetarism's popularity but clearly demonstrated the importance of money supply in the economy. Early new classicals considered themselves monetarists, [] but the new classical school evolved. New classicals abandoned the monetarist belief that monetary policy could systematically impact the economy, [] and eventually embraced real business cycle models that ignored monetary factors entirely.

New classicals broke with Keynesian economic theory completely while monetarists had built on Keynesian ideas. New classicals replaced monetarists as the primary opponents to Keynesianism and changed the primary debate in macroeconomics from whether to look at short-run fluctuations to whether macroeconomic models should be grounded in microeconomic theories.

Other leaders in the development of new classical economics include Edward Prescott at University of Minnesota and Robert Barro at University of Rochester. New classical economists wrote that earlier macroeconomic theory was based only tenuously on microeconomic theory and described its efforts as providing "microeconomic foundations for macroeconomics. Most controversially, new classical economists revived the market clearing assumption, assuming both that prices are flexible and that the market should be modeled at equilibrium. Keynesians and monetarists recognized that people based their economic decisions on expectations about the future.

However, until the s, most models relied on adaptive expectations , which assumed that expectations were based on an average of past trends. Thomas Sargent and Neil Wallace [n] applied rational expectations to models with Phillips curve trade-offs between inflation and output and found that monetary policy could not be used to systematically stabilize the economy. Sargent and Wallace's policy ineffectiveness proposition found that economic agents would anticipate inflation and adjust to higher price levels before the influx of monetary stimulus could boost employment and output.

Robert E. Hall [o] applied rational expectations to Friedman's permanent income hypothesis that people base the level of their current spending on their wealth and lifetime income rather than current income. In Lucas wrote a paper [p] criticizing large-scale Keynesian models used for forecasting and policy evaluation. Lucas argued that economic models based on empirical relationships between variables are unstable as policies change: a relationship under one policy regime may be invalid after the regime changes.