Monetarist and New Classical theories
Explain the evolution of the Monetarist and New Classical theories.
The monetarist analysis of the economy places a great deal of stress on the velocity of money, which is defined as the number of times a dollar bill change hands, on average, during the course of a year. The velocity of money is the rates of nominal GDP to the stock of money, or V=GDP/M= (P x Y) (M. Alternately, M x V=P x Y). The New Classical model, firms are assumed to be perfectly aggressive “price takers”, with no control over the price. For instance, manufacturing firms, airlines, and many other firms can choose exactly what price to set, but they have no control over the amount sold (Gordon, 2009). New Classical approach originated by Milton Friedman, then at the University of Chicago, and Edmund S. Phelps of Colombia University. It was later more fully developed by Robert E. Lucus Jr, of the University of Chicago. Based on the idea that households and firms lack the full set of information needed, to make their economics decisions. Based not on imperfect information, but on shocks to technology and supply conditions (Case, p. 553). The New Classical macroeconomic has industrial from two different but related sources: the theoretical and the practical critiques of traditional macroeconomics. On the theoretical level; there has been growing dissatisfaction with the way traditional models treat expectations. Prices and wages do no change fast enough for classical self correction to occur (Case, p.568).
Describe how New Keynesian theory justifies the Keynesian policy prescriptions.
The largest government budget deficits have been incurred as a resulting of wars, when government expenditures increased more than government tax revenues. John Keynes’s prescription for financial crises, aggressive government action and, by definition, big budget deficits has been Washington’s basic approach since Lehman Brothers collapsed last September. Eleven months later, the economy remains deeply uneasy,
The monetarist analysis of the economy places a great deal of stress on the velocity of money, which is defined as the number of times a dollar bill change hands, on average, during the course of a year. The velocity of money is the rates of nominal GDP to the stock of money, or V=GDP/M= (P x Y) (M. Alternately, M x V=P x Y). The New Classical model, firms are assumed to be perfectly aggressive “price takers”, with no control over the price. For instance, manufacturing firms, airlines, and many other firms can choose exactly what price to set, but they have no control over the amount sold (Gordon, 2009). New Classical approach originated by Milton Friedman, then at the University of Chicago, and Edmund S. Phelps of Colombia University. It was later more fully developed by Robert E. Lucus Jr, of the University of Chicago. Based on the idea that households and firms lack the full set of information needed, to make their economics decisions. Based not on imperfect information, but on shocks to technology and supply conditions (Case, p. 553). The New Classical macroeconomic has industrial from two different but related sources: the theoretical and the practical critiques of traditional macroeconomics. On the theoretical level; there has been growing dissatisfaction with the way traditional models treat expectations. Prices and wages do no change fast enough for classical self correction to occur (Case, p.568).
Describe how New Keynesian theory justifies the Keynesian policy prescriptions.
The largest government budget deficits have been incurred as a resulting of wars, when government expenditures increased more than government tax revenues. John Keynes’s prescription for financial crises, aggressive government action and, by definition, big budget deficits has been Washington’s basic approach since Lehman Brothers collapsed last September. Eleven months later, the economy remains deeply uneasy,
References: Blinder, A. S. (2008). The Concise Encyclopedia of Economics Keynesian Economics. Retrieved November 09, 2010, from Library of Economics and Liberty: http://www.econlib.org/library/Enc/KeynesianEconomics.html Case, F. (2009). Debates in Macroeconomics, Monetarism, New Classical Theory, and Supply Side Economics. In K. Case, R. Fair, & S. Oster, Principle of Economics (p. 816). Prentice Hall. Gordon, R. J. (2009). Macroeconomics Eleventh Edition. Boston: Pearson Education Inc.