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Eco 200 – Principles of

Macroeconomics

Chapter 16: Alternative macroeconomic models


Alternative macroeconomic
models
 Fixed-price Keynesian model
 New Keynesian model
 Monetarist model
 New classical model
Fixed-price Keynesian model
 Assumes a constant price level
 This model was popular during and
immediately after during the Great
Depression
 little concern about inflation
Fixed-price Keynesian model
Policmakers’ role in fixed-price
Keynesian model
 private economy is inherently unstable
 advocates active role for government in
stabilizing the economy
New Keynesian model

 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)

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