Irving Fisher's view: V is fairly constant. 2. Equation of exchange no longer
identity. 3. Nominal income, PY, determined by M. 4. Classicals assume Y fairly ...
• Revision Lecture 20th of May!
Keynesian Macroeconomics Mankiw Chapter 9
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So far
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Keynesian View • Keynes (1936) General Theory
• Particular attention to microfoundations of macroeconomics to account for buiness cycle fluctuations • Optimizing consumers / firms • Pareto Optimality • Market clearing • Modern macroeconomics
• There is a distinction in the short and long run • In the short run prices or wages are sticky! • i.e. in the short run goods and labour markets do not clear..
• There are other BC theories that rely on ad hoc specifications for price/wage adjustment Copyright: Dr Yunus Aksoy
• Money is not neutral in the short run • Strong implications for policymaking 3
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unemployment • Microfounded models look at employment not unemployment • Keynesian model has a say on this
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Quantity Theory of Money Velocity P×Y V= M Equation of Exchange
Aggregate Demand M×V=P×Y
• Quantity equation of aggregate demand
Quantity Theory of Money 1. Irving Fisher’s view: V is fairly constant 2. Equation of exchange no longer identity 3. Nominal income, PY, determined by M 4. Classicals assume Y fairly constant 5. P determined by M
M*V = P*Y Or
Quantity Theory of Money Demand 1 M= × PY V
M/P = Y/V
Md = k × PY Implication: interest rates not important to Md Copyright: Dr Yunus Aksoy
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Shifts in AD P×Y V= = M
2000 = 2 1000
Modern Quantity Theory of Money M×V=P×Y Implication: M determines P × Y Deriving AD Curve M = 1000, V = 2 ⇒ P × Y = 2000 Point A: P=2 Y = 1000 PY = 2 × 1000 Point B: P=1 Y = 2000 PY = 1 × 2000 Point C: P = .5 Y = 4000 PY =.5 × 4000 Conclusion: P ↑ Y ↓, downward sloping AD Shift in AD Curve M ↑: P×Y ↑, so at given P, Y ↑ ⇒ AD shifts right Copyright: Dr Yunus Aksoy
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Aggregate Supply • Keynesian’s distinguish two types of AS.. – short run AS – long run AS
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In the short run prices are sticky! • Menu costs • Pricing to market • Etc..
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From Short-run to Long run • In the short run prices are sticky and AS curve is flat • A change in AD affects output not prices • In the long run prices are flexible and AS curve is vertical • Prices adjust • A change in the AD affects prices not output Copyright: Dr Yunus Aksoy
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According to Keynesian’s stabilization possible • Suppose a money demand shock after the millennium bug fears are cleared. • M/P = Y/V • Given money supply, velocity of money rises, • nominal spending should rise when prices are sticky in the SR • Demand push shock • CB can reduce money supply to stabilize inflation • Unlike the case with monetary intertemporal model assume that CB can observe all macroeconomic data! Copyright: Dr Yunus Aksoy
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Look at the Millennium Bug! (Percentage Change in the US M1 Currency Component)
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An AS (cost pull) shock • Suppose energy prices go up due to OPEC cartel.. • Stagflation • What to do about it?
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– Do nothing – Accommodate AS shock at the cost of permanently higher prices
