|
| QUICK REVIEW 17-2 |
|
- Mainstream economistssay that macroeconomic
instabilityusually stems from swings in investment spending and
occasionally
from
adverse aggregate supply shocks.
- Monetarists view the economy through the equation
of exchange(MV 5 PQ). If velocityV is stable
changesin the money supply M directly lead
to changes in nominal GDP (5 P 3 Q). For monetarists
changes in M via inappropriate
monetary policy are the single most important cause of macroeconomic instability.
- In the real-business-cycletheory
significant
changes in "real" factors such as technology
resource availability
and
productivity change the economy's long-run aggregate supply
causing macroeconomic
instability.
- Macroeconomic instability can result from
coordination failures--less-than-optimal equilibrium positions which occur because
businesses and households lack some way to jointly coordinate their actions.
|
| QUICK REVIEW 17-3 |
|
- New classical economists believe that the economy
"self-corrects" when unanticipated events divert it from its full-employment
level of real output.
- In RET unanticipated price-level changes cause
changes in real output in the short run but not in the long run.
- According to RET
market participants immediately
change their actions in response to anticipated price-level changes such that no change in
real output occurs.
- Mainstream economists believe that downward price
and wage inflexibility means that the economy can get mired in recession for long periods.
- Sources of downward wage inflexibility include
contracts
efficiency wages
and insider-outsider relationships.
|
|
