MacroeconomicsI_working_version (1)

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Brief Inquiry into History of Economic Thought 15 Economic welfare (normative part of the neo-classical economics) • Does the market equilibrium situation lead to the maximising of satisfaction of the needs and wants from the limited resources? Is the economic system effective in that way? A. Pigou stated that economic system allocates limited resources effectively, but it does not always lead to the maximisation of the welfare. To prove it he applied the principle of diminishing marginal utility. 2.3. Keynesian Economics • Till 20’s of the last century neoclassical economics was the most influential economic school. The neo-classics presented their school as a homogenous theoretical system capable to cope with all basic economic questions and problems. However the Great World-wide Depression put the neo-classical economics into a crises. Economic depression was not in line with their thought. • John Maynard Keynes (1883 – 1946): The General theory of Employment, Interest and Money (published in 1936); • R. Kahn, J. Robinson, R. Harrod, A. Hansen; • object of interest: Macroeconomics, approach: Interventionism; • refused the main neoclassical ideas (self-regulating system, Say’s law, liberalism). • National economy is not a stable system. • Keynes explained (clarify) the existence of a long-term depression. He theoretically doubted the Say’s law by reformulating a the savings function. There is no automatic mechanism that would transform savings into investments (classics: interest rate). Savings depend on income. • Unemployment is a result of a deficient aggregate demand. Thus the government interventions supporting aggregate demand (consumption, investment) are necessary. The effective aggregate demand theory. He justified theoretically the need of the state (external) interventions into the economy. (Expansive fiscal policy, accommodating monetary policy, fiscal deficits, fiscal multiplier). • Keynes considered his theory as a general economics and the neoclassical economics as a special case of his general economics. (A special case describing economy at the full employment level). • Preference of liquidity, interest as a reward for abandoning (surrendering) of liquidity; • neo-classical synthesis in 60’s (neo-keynesian economics) – synthesis of keynesian and neo-classical economics. Keynesianism became a special case of a general neoclassical economics (the special case for the economy with rigid wages). Keynesian theory – valid in a short run, neo-classical theory valid in a long run. • AS – AD model, IS – LM model, the Phillips curve; • 60/70’s (oil shocks) - crises of (neo) keynesian economics (Hicks, Samuelsson) loosing the influence; • 80’s New Keynesians – closer to liberal approach, focused on explanation of wage rigidities (microeconomic view) – Mankiw, Fischer. • Post-keynesian theory returns to the original (orthodox) Keynesian theory (Robinson, Kaldor, Weintraub).
16 Chapter 2 2.4. (Neo)conservative Economics • Return to the neo-classical economics, new macroeconomics; • main schools: monetarism, rational expectation school, supply side economics. • main common characteristics: liberalism, assumption of internal stability of economic system, criticism of keynesian economics, neutrality of money, inflation (vs. unemployment in keynesian economics). Monetarism • M. Friedman, the Chicago school; point of departure for the conservative economics; • central role of money in the economy, role of monetary policy; • capitalism is an internally stable system with self regulating abilities; • crises, depressions and fluctuations are results of the external monetary shocks caused by the central bank; • adaptive expectations (based on the past experience), natural rate of unemployment, vertical Phillips curve in the long run; • the golden rule of the monetary growth, change in money supply growth affects output in the short run and price level in the long run (with disappearing real effect on output). Rational Expectations School • 1961 J. Muth – rational expectations hypothesis; • 1971 R. Lucas, T. Sargent – founders of the rational expectation school (sometimes called New Classical Macroeconomics); • relates the traditions of Monetarism with the differences of rational expectations and strict neutrality of money even in the short run; • rational (individual) expectations – taking into account all possible information (including the future forecasts and estimations); • aggregate expectations are correct; • macroeconomic policy is effective only in case of the unexpected external shock; • recommendations for the macroeconomic policy: clear and stable rules, minimising of the public sector (deregulation, privatisation), transparent policy; • main school of the present conservative economics; • end of the neoclassical synthesis. Supply Side Economics • End of 70’s; A. Laffer, G. Gilder, M. Feldstein; • The Supply side economists related the old classics in terms of focusing on the supply side on economics. They pointed out individual economic motivation to work, save and invest. They were practically oriented – dealt with macroeconomic policy.
Page 1 and 2: Mendel University for Agriculture a
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82 Chapter 8 If the total labour fo
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84 Chapter 8 8.4.3. Types of Unempl
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86 Chapter 8 Noneconomic costs Long
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88 Chapter 9 We speak about inflati
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90 Chapter 9 9.2. Three Grades of I
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92 Chapter 9 9.3.2. Cost-Push Infla
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94 Chapter 9 P AS’’ AS’ P‘
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96 Chapter 9 This relationship, kno
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104 Chapter 10 Macroeconomic policy
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106 Chapter 10 11.1.2. Monetary Pol
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108 Chapter 10
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110 Chapter 12 The main tools of go
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112 Chapter 12 P AD’ AD AS Q* Q F
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114 Chapter 12 12.2. Non-Discretion
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116 Chapter 12 12.4. Crowding-Out E
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118 Chapter 13 Central banks have a
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120 Chapter 13 We can summarise the
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122 Chapter 13 (a) Monetary Tighten
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International Linkages 125 14. Inte
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International Linkages 127 A nation
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International Linkages 129 required
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International Linkages 131 foreign
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International Linkages 133 The dete
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Money Market, Money Supply, Money D
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The Phillips Curve 97 10. The Phill
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The Phillips Curve 99 ∆P/P ∆W/W
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The Phillips Curve 101 10.3. Moving
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