Professional Documents
Culture Documents
Chapter 16 - Alternative Macroeconomic Model
Chapter 16 - Alternative Macroeconomic Model
Macroeconomics
Recognizes
that the
price level is
not constant
New Keynesian model
argue that prices and wages are not
flexible (especially in a downward
direction) in the short run
Firms respond to a reduction in the
demand for output by cutting
production (and labor use), not prices
(and wages)
Policymakers’ role in the New
Keynesian model
Essentially the same as for traditional
Keynesians (but with more attention
paid to inflation)
Monetarist economics
Money supply affects output and the
price level in the short run
Economy is believed to be inherently
stable, with rapid self-adjustment.
Lags:
recognition lag
reaction lag
effect lag
Policymakers’ role under
monetarist economics
Believe that discretionary policy is
inherently destabilizing due to long and
variable lags
Prefer a reliance on fixed rules
New classical model
Classical
model was
the
dominant
macroecon
omic theory
until the
Keynesian
revolution
New classical model
Relies on rational expectations
Wages and other resource prices are
assumed to respond immediately to any
anticipated policy change.
New classical model
Policymakers’ role under the
new classical model
discretionary policy is not effective
prefer the use of fixed rules (with
credible policy announcements)