Chapter 1_Keynes and the Classic

8/20/2019 Chapter 1_Keynes and the Classic

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MacroeconomicsAbdul Hadi Ilman

Sumbawa University of Technology


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What will we learn? Trying to integrate two uite di!erent schools of thought

• "ew #lassical vs $eynesian

• #lassical micro%foundation& and e'cluding mar(et failure

• $eynesian macro )olicy& and e'cluding micro%foundation

The develo)ment of the *"ew "eoclassical Synthesis+

• a system that involved the #lassical model determining full eu

and a $eynesian model of tem)orarily stic(y )rices determining

a))roach to that full euilibrium

Short run issues, dynamics& e')ectations& and micro%foundations

-ong run issues, natural unem)loyment rate& old and new growth


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What will we learn? Thea))lications the -ucas critiue of standard methods

for evaluating )olicy&

credibility and dynamic consistency

issues in )olicy design&

the sustainability of rising debt levels

and an evaluation of .uro)e/s Stability

0act&

the o)timal in1ation rate&

the im)lications of alternative monetary

)olicies for )ursuing )rice stability )rice%

level vs in1ation%rate targeting& 3'ed vs

1e'ible e'change rates4&

ta' reform tric(le%down cont

and whether second%best init

conditions ease the trade%o!

e5ciency and euity ob6ectiv

theories of the natural unem

rate and the )ossibility of mu

euilibria&

alternative low%income su))o

)olicies& and globali7ation in

the alleged threat to the sco)

inde)endent macro )olicy48


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$eynes and the#lassic#ha)ter 9

Ma(roe(onomi 2

Abdul Hadi Ilman


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Introduction $eynesian view is that ad6ustment bac( to euilibrium sim)ly d

ta(e )lace without )olicy assistance8

i4 the economy has multi)le euilibria& only one of which involves :full:em)loyment; or

ii4 there is only one euilibrium& and it involves :full: em)loyment& but tsystem is unstable without the assistance of )olicy& so it cannot reach th

em)loyment euilibrium on its own8 Stability vs outright instability

#ha)ter 9, S)eci3cation in the labor mar(et& to clarify the causunem)loyment, Perfectly exbile money wages (Classical)

Completely xed money wages (Keynesian)


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Introduction #ha)ter 2& we assume that nominal rigidities are only tem)orary& and we consider a dyna

that has #lassical )ro)erties in full euilibrium& but $eynesian features in the transitional way to full euilibrium

In #ha)ter


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#riteria for Model Selection Croad criteria for macro models

• @irst& models must be sub6ected to em)irical tests& to see w)redictions are consistent with actual e')erience8

• Second& should be evaluated as to their consistency with o)under)innings8 Microeconomics base

@rustrating debate in 9DBEs and 9DFEs between these two scthought

In 9DDEs& there were constructive dialogs to combine the besof the com)eting a))roaches so that now the sub6ect is em)a))licable& has solid micro%foundations& and it allows for mar


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#lassical .conomics .conomists,

Adam Smith Scottish)hiloso)her4

Alfred MarshallCritish economist4

Arthur #ecil 0igou Critisheconomist4

Gavid icardo Critish economist4

S8Mill

Malthus

#."TA- 0I"#I0-.

The economy is bestorganised as a self%regulating system ofmar(ets8

$nown also as, laisse7faire& liberal& su))ly s


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#lassical .conomics Wages and )rices are

fully 1e'ible in order toclear mar(ets ra)idly8

.conomy o)erates at fullem)loyment most of thetime8 #lassical aggregatecurve is vertical

Minimal govt intervere1ecting distrust ofgovernment and belits ine5ciency8

Unem)loyment in theconomy is eitherJoluntary or due to s.'ternal Interference


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$eynesian .conomics Advocates,

• @rancis Ksidro .dgeWorth

• ean%Ca)tist Say

• 0aul Samuelson

• ohn Maynard $eynes

#."TA- 0I"#I0-.

The economy ofteno)erates at less than fullem)loyment; mar(etsystem does not self ad6u

$nown also as, interventionist& demand side


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$ey Gi!erences I" TH. #-ASSI#A- WL-G

• @ree mar(et economies are always stable

• Tending towards full em)loyment full )roduction euili

• @ree 1uctuating )ricies in the three macro mar(ets Noodlabor4

I" TH. $.K".SIA" WL-G

• @ree mar(et economies are unstable

• .uilibrium but no reason for full em)loymentOfull )roduc


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#lassical Model Assum)tions,

.ndogenous variable

• Y, N, r, P, and W

#lassical Gichotomy, the (ey real variables out)ut and em)loyment4 are determined s

basis of aggregate su))ly relationshi)s the factor mar(et relations and the )roduction

the demand considerations the IS and -M curves4 determine the other variables r


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#lassical Jiew onUnem)loyment The labor the other resources are always fully em)loy

Neneral unem)loyment is assumed to be im)ossible8

If there is any unem)loyment& it is assumed to be tem

abnormal8

In the long run the economy will have full em)loyment

rate of unem)loyment if wages )rices are 1e'ible


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#lassicalPs eason for @ull.m)loyment SayPs law, Su))ly creates its own demand8

Abstinence theory of interest, Interest rate in1uences )e

saving8

#lassical theorists held that wages )rices would chang)ro)ortionallyNra)hically the )ure classical theorists would have a vertcurve8 That shows the same NG0 associated with full emat each level in the economy8


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#lassicalPs eason forUnem)loyment Intervention by the

governmentO)rivate

mono)oly8

Wrong calculation by

entre)reneurs

inaccurate decisions

Arti3cial resistance

• #lassical unem)loyment

when real wages are (e)

mar(et clearing wage rat

to a sur)lus of labor su))

• #lassical unem)loyment

(nown as real wage unem

Cecause it refers to real w

being too high8


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$eynesian .conomics

Mar(ets clear only slowly& if at al

In a de)ression or recession&much em)loyment isinvoluntary8

.conomy o)erates less often thanfull em)loyment& since mar(etdonPt clear

Novt intervention may be desirableto stabili7e the business cycle8@iscal and monetary )olicies4

Gemand becommuch bigger driforce

Su))ly will ad6usdemand

According to $eyGemand createsown su))ly+


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$eynesian )olicy Im)licatio

Under the classical system& government had no rmanagement of the economy% *-aisse7 faire+ do

Under $eynes& Novernment must ste) into to corinstability of the economy8

• If the economy faces recessionary ga)& govt must incre

demand by s)ending more; lowering ta'es;lowering int• If the economy faces an in1ationary ga)& govt must red

demand by s)ending less; raise ta'es; increase interes


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$eynesianPs view onUnem)loyment $eynesian theory holds that unem)loyment is the norma

the economy signi3cant government intervention is reem)loymentOout)ut targets are to be reached

#entral $eynesian conclusion,• AG determines real NG0• In short run& AG can be ad6usted to achieve target NG0

unem)loyment levels with )rices not changing 3'ed& 1


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#onclusion Unem)loyment can e'ist only in the )resence of some st

in money wage8

Should we advocate increased wage 1e'ibility so as to avleast some unem)loyment?

• Micro view, )rivate agents must have ado)ted the insti

tem)orarily rigid wages contracts4 for a reason and thmust be understood before one can be con3dent that iwage 1e'ibility is :good8:

• Macro view, the microeconomic costs of increased 1e'iwould not be large and& therefore& directly )roceed withmacroeconomic analysis %of whether the built%in stabili

overall economy is enhanced by wage 1e'ibility


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Tugas

Cu(ti(an bahwa slo)e AG negative

Chapter 1_Keynes and the Classic

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