Chapter 26 - An aggregate supply and demand perspective on money and economic stability. In this chapter you will learn to analyze the debate centering on the stability of the economy around its full employment level, define the role crowding out has in debates between Keynesians and monetarists, explain the Phillips curve and its relevance for fiscal and monetary policies. | Chapter 26 An Aggregate Supply and Demand Perspective on Money and Economic Stability Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Analyze the debate centering on the stability of the economy around its full employment level • Define the role crowding out has in debates between Keynesian and monetarists • Explain the Phillips curve and its relevance for fiscal and monetary policy • Understand the importance of real versus nominal interest rates in the discussion of monetary policy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 26-2 Introduction • The importance of money in explaining aggregate economic outcomes is a defining distinction between classical and Keynesian economists • Monetarists—group of economists who uphold the classical tradition of nonintervention and believe that money supply should not be a focus of government policy as a tool of economic stability Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 26-3 1 Introduction (Cont.) • New Classical Macroeconomists—refining Monetarists thinking by focusing on rational expectations • The important elements of the Monetarists-Keynesian debate can be articulated within the aggregate supply and demand framework – – – – Stability of the economy Relative effectiveness of monetary/fiscal policy The causes of inflation Consequences for interest rates Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 26-4 Is the Private Sector Inherently Stable? • Monetarists tend to believe that aggregate demand will be relatively unaffected by autonomous shifts in investment spending • Keynes felt active attempts at stabilization were necessary to counter entrepreneurial animal spirits Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 26-5 Is the Private Sector Inherently Stable? (Cont.) • Monetarists – Exogenous decrease in investment spending will be automatically countered by increased consumption or interest-sensitive .
