Matakuliah
Tahun
: J0114-Teori Ekonomi
: 2009
DISPUTES OVER MACRO THEORY AND
POLICY
Pertemuan 15
Classical Economics and Keynes
The Classical View
– Vertical Aggregate Supply Curve
– Stable Aggregate Demand
Keynesian View
– Horizontal Aggregate Supply to Full
Employment
– Unstable Aggregate Demand
Bina Nusantara University
3
Classical Economics and Keynes
Classical Theory
Keynesian Theory
a
P1
b
Price Level
Price Level
AS
c
P2
P1
AS
y
x
AD1
AD1
AD2
AD2
Qf
Real Domestic Output
Bina Nusantara University
Qu
Qf
Real Domestic Output
4
Causes of Macro Instability
• Mainstream View
– Changes in Investment Spending
Ca + Ig + Xn + G = GDP
– Adverse Aggregate Supply Shocks
• Mainstream View
– Changes in Investment Spending
Ca + Ig + Xn + G = GDP
– Adverse Aggregate Supply Shocks
Bina Nusantara University
5
Causes of Macro Instability
• Real-Business-Cycle View
– Real-Business-Cycle Theory
Price Level
ASLR2 ASLR1
P1
AD1
AD2
Bina Nusantara University
Q2
Q1
Real Domestic Output
6
Causes of Macro Instability
• Coordination Failures
– Unemployment Equilibrium
– Inflation Equilibrium
Bina Nusantara University
7
Does the Economy Self-Correct?
• New Classical View of Self-Correction
–
–
–
–
Rational Expectations Theory
New Classical Economics
Speed of Adjustment
Unanticipated Price-Level Changes
• Price-Level Surprises
– Fully Anticipated Price-Level Changes
• Mainstream View of Self-Correction
– Downward Wage Inflexibility
– Efficiency Wage Theory
• Greater Work Effort
• Lower Supervision Costs
• Reduced Job Turnover
• Insider-Outsider Relationships
Bina Nusantara University
– Insider-Outsider Theory
8
Does the Economy Self-Correct?
New Classical View of Self-Correction
ASLR
AS1
Price Level
AS3
P1
P4
f
a
d
e
P5
AD1
AD3
Bina Nusantara University
Q4 Q3
Q1
Real Domestic Output
9
Rules or Discretion?
• In Support of Policy Rules
– Monetary Rule
• Inflation Targeting
– Balanced Budget
• In Defense of Discretionary Stabilization
Policy
– Discretionary Monetary Policy
– Discretionary Fiscal Policy
• Increased Macro Stability
Bina Nusantara University
10