Macroeconomics Chapter 15 Flashcards

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Questions and Answers

What do Keynesian economists believe about macroeconomic policies?

They call themselves the 'new Keynesian' and emphasize the inflexibility of wages and prices, recommending activist government macroeconomic policies for economic growth.

What does the Keynesian model assume?

Prices are constant and changes in aggregate spending determine equilibrium real GDP.

What does the fixed price Keynesian model graph show?

The aggregate supply curve is a horizontal line at fixed price levels, and changes in aggregate demand affect real GDP without changes in price level.

How do modern Keynesians view the aggregate supply curve?

They believe it is horizontal only at low levels of real GDP and becomes positively sloped as GDP increases. Signup and view all the answers

What is Keynesian economics?

It is a school of thought that emphasizes the government's role in stabilizing the economy through managing aggregate demand. Signup and view all the answers

What do New Keynesians believe about wages and prices?

They believe wages and prices are not flexible in the short run. Signup and view all the answers

What role do Keynesians believe the government should play in achieving equilibrium?

They advocate for an active government role to offset private sector shifts in aggregate demand. Signup and view all the answers

What does monetarist economics emphasize?

It emphasizes the role of changes in the money supply in determining equilibrium real GDP and price levels. Signup and view all the answers

How do monetarists believe changes in the money supply affect the economy?

An increase in the money supply raises business and household spending, pushing aggregate demand up. Signup and view all the answers

What do monetarists believe about the effects of monetary policy?

They believe it has only short-term effects on real GDP, with long-term effects reflected in price levels. Signup and view all the answers

What role do monetarists believe the government should play in the economy?

They advocate for minimal government intervention and believe in the self-correcting nature of markets. Signup and view all the answers

Why do monetarists argue against aggressive economic policies?

They claim that economic policy operates with long and variable lags, leading to inappropriate responses to changing economic conditions. Signup and view all the answers

What kind of rules do monetarists believe the government should set?

They prefer stable, predictable rules such as balancing the budget annually and controlling money supply growth. Signup and view all the answers

What is classical economics?

It is a school of thought that assumes real GDP is determined by aggregate supply and the equilibrium price level by aggregate demand. Signup and view all the answers

What does the classical model graph illustrate?

It shows aggregate supply as vertical and that changes in aggregate demand only affect price levels, not equilibrium output. Signup and view all the answers

What do new classical economists believe about changes in real GDP?

They believe these changes are due to unexpected changes in price levels and that wages are flexible. Signup and view all the answers

What role do new classical economists believe the government should have in the economy?

They argue that government policies should focus on achieving stable inflation rather than manipulating GDP or unemployment. Signup and view all the answers

What influence do economic theories have on government policy?

Each macroeconomic theory influences government policy, adapting to economic performance and the shortcomings of previous theories. Signup and view all the answers

What major source of problems do new Keynesians identify?

Disequilibrium in private labor and goods markets. Signup and view all the answers

According to monetarists, what is the major source of economic problems?

Government's discretionary policies that affect aggregate demand. Signup and view all the answers

What do new classical economists identify as the major source of problems?

Government attempts to manipulate aggregate demand. Signup and view all the answers

Study Notes

Key Concepts in Macroeconomic Theories

New Keynesian Economics
- Advocates active government macroeconomic policy to promote economic growth.
- Emphasizes wage and price rigidity, leading to potential unemployment without intervention.
- Role of government is crucial to counterbalance shifts in private sector aggregate demand.
Keynesian Model Assumptions
- Assumes prices are constant and that changes in aggregate spending directly influence equilibrium GDP.
Aggregate Supply Curves
- Fixed Price Keynesian Model features a horizontal aggregate supply curve, indicating no price level changes with shifts in aggregate demand.
- Modern Keynesian view holds that aggregate supply is horizontal at low GDP levels but becomes positively sloped as output increases, reflecting increasing inflationary pressures.

Economic Schools of Thought

Keynesian Economics
- Highlights the necessity of government involvement in stabilizing the economy by managing aggregate demand.
Monetarist Economics
- Believes changes in the money supply significantly impact overall economic activity, affecting GDP and price levels.
- Emphasizes that monetary policy has only short-term effects on real GDP, with long-term changes reflected in price level adjustments.
Classical Economics
- Argues that real GDP is determined by aggregate supply, while price levels are influenced by aggregate demand.
- Operates under the assumption of perfect wage and price flexibility.
New Classical Economics
- Views real GDP changes as a result of unexpected price level variations, maintaining that markets generally operate at equilibrium.
- Rejects government intervention unless policies are unexpected, favoring stable, predictable monetary policies.

Government Roles in Economic Stability

Keynesian Perspective
- Government should actively address shifts in aggregate demand to prevent recession; monetary and fiscal policies should intervene during inflationary pressures.
Monetarist Perspective
- Advocates for minimal intervention, asserting that the economy can self-correct without government involvement; emphasizes fixed monetary rules instead of discretionary policies.
New Classical Perspective
- Suggests that predictable government policies can foster long-term economic stability; however, warns against active manipulation of aggregate demand, which can disrupt equilibrium.

Historical Context and Evolution of Theories

Economic theories have adapted in response to historical performance and the shortcomings of existing models.
The proliferation of new models stems from failures of older theories to adequately address contemporary economic challenges.

Influences on Government Policy

Keynes’ theories spurred widespread adoption of activist fiscal policies.
Monetarist views encouraged the Federal Reserve to focus on money growth targets over interest rate controls.
New Classical theories emphasize the importance of clear communication from policymakers to help individuals set future economic expectations.

Summary of Major Approaches

New Keynesian
- Sees disequilibrium in labor and goods markets as a key concern; advocates for active management of economic policies.
Monetarist
- Attributes problems to discretionary government policies affecting aggregate demand; promotes the necessity of adhering to consistent monetary growth rules.
New Classical
- Identifies government attempts to manipulate aggregate demand as problematic; supports the need for stable fiscal and monetary policies for long-term economic health.

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Description

Explore the key concepts of Chapter 15 in Macroeconomics, focusing on the new Keynesian, monetarist, and new classical viewpoints. These flashcards cover fundamental beliefs about macroeconomic policies, including wage and price inflexibility and government intervention strategies aimed at economic growth.