Eco 200

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Eco 200 Principles of Macroeconomics

• Chapter 16 Alternative macroeconomic models

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Alternative macroeconomic models

• Fixed-price Keynesian model
• New Keynesian model
• Monetarist model
• New classical model

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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

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Fixed-price Keynesian model
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Policmakers role in fixed-price Keynesian model

• private economy is inherently unstable
• advocates active role for government in
  stabilizing the economy

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New Keynesian model

• Recognizes that the price level is not constant

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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)

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Policymakers role in the New Keynesian model

• Essentially the same as for traditional
  Keynesians (but with more attention paid to
  inflation)

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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

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Policymakers role under monetarist economics

• Believe that discretionary policy is inherently
  destabilizing due to long and variable lags
• Prefer a reliance on fixed rules

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New classical model

• Classical model was the dominant macroeconomic
  theory until the Keynesian revolution

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New classical model

• Relies on rational expectations
• Wages and other resource prices are assumed to
  respond immediately to any anticipated policy
  change.

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New classical model
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Policymakers role under the new classical model

• discretionary policy is not effective
• prefer the use of fixed rules (with credible
  policy announcements)