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memorize.ai (lvl 286)

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Section 1

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Mainstream View

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Last updated

6 years ago

Date created

Mar 1, 2020

Cards (12)

Section 1

(12 cards)

Mainstream View

Front

Mainly followed this approach when describing the causes of recessions and expansions via the aggregate expenditures model (Y= C + I + G + NX). Instability in real GDP comes from instability in expenditures & from fluctuations in investment spending. As firms dramatically increase or cut investment spending (driving booms or busts), aggregate demand shifts to the right or left of long run equilibrium. Unanticipated changes in aggregate supply can also cause instability. Focuses on expenditure and aggregate demand. *Argue changes in money supply work indirectly via increased investment

Back

Macroeconomics

Front

Born during the Great Depression grew from a need to understand the entire economy and to provide guidance on how to manage the entire economy.

Back

Monetarist view

Front

-macro instability is due to improper monetary policy -there is a focus providing enough money to the economy -changes in the money supply only affect prices in the long-run

Back

4 views compete to explain macroeconomic instability and how best to respond:

Front

-Mainstream View -Monetarist View -Real Business Cycle -Self-correction

Back

Monetarist View

Front

Argue that simply putting more money in circulation means people will buy more goods and services leading firms to produce more and hire additional labor. Over time, prices and wages will rise, returning the economy to the long run equilibrium. Changes in money supply may have short run effect, and in the long run money effects just prices, not output. *Macroeconomic instability results from improper monetary policy (too much or too little money in the economy)

Back

Monetarist view

Front

An economic school of though that emphasizes the importance of the money supply and therefore monetary policy in determining the level of output in an economy

Back

"The financial crisis of 2007 could have been worse had the Fed not loosened the money supply as much as it did."

Front

monetarist

Back

Real Business Cycle Theory

Front

Argue economic instability results from real economic events (technological innovations or changes in resource availability). They see no need for intervention in the short run. Focuses primarily on change in productivity or long-run aggregate supply Example: Permanent improvement in productivity due to new technology might cause long-run aggregate supply curve to shift right. Resulting in changing output and price levels. The business cycles we observe are a supply side, not a demand-side phenomenon.

Back

Real Business Cycle Theory

Front

Importance of technological innovation and resource availability in determining aggregate supply and therefore the level of output in an economy. *the business cycles we observe are a supply-side

Back

Mainstream View

Front

An economic school of thought that emphasizes volatility in investment spending as the primary cause of changes in aggregate demand and therefore the level of output in the economy.

Back

Politicians often argue over economic policies

Front

Because unlike supply and demand, aggregate supply and demand, many theories compete to explain how the economy works (and explain how aggregate supply and demand actually work). Depending on their view of macroeconomic, they may hold very different opinoins about the right policy response.

Back

Self-correction

Front

Argue the best policy response to macroeconomic instability is usually to let the economy sort itself out. Based on the notion that since markets are more dynamic than governments, and naturally move to stable equilibriums, the economy will self correct on its own faster than it would with outside intervention. *Laissez Faire approach

Back