Chapter 32 Macroeconomics: where do we stand

1
Chapter 32Macroeconomics where do we stand?

• David Begg, Stanley Fischer and Rudiger
  Dornbusch, Economics,
• 6th Edition, McGraw-Hill, 2000
• Power Point presentation by Peter Smith

2
Macroeconomics in perspective

• There is a spectrum of views about the
  macroeconomy
• especially with regard to
• market clearing
• expectations formation
• speed of adjustment

3
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 do not clear
  (especially the labour market)
• and there is more scope for the government to
  influence the macroeconomy.

4
Expectations formation

• Beliefs about the future shape todays decisions
• but how do 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

5
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

6
A stylized view of the competing views
New Classical
Gradualist monetarist
Moderate Keynesian
Extreme Keynesian
Very fast
Quite fast
Quite slow
Very slow
Market clearing
Adjust more slowly
Rational adjust quickly
Could be fast or slow to adjust
Adjust slowly
Expectations
Dont neglect short run
Long run more important
Long run/ short run
Not much difference
Short run v. important
Could stay away
Never too far away
Could be far away
Full employment
Always close
Might be big problem
Not a big problem
No problem
No problem
Hysteresis
Demand management useless need supply-side
Supply-side more important avoid wild swings in
demand
Demand management important too
Demand management is what counts
Policy conclusion