Today we will learn about the neoclassical theories that compete with the Keynesian view of monetary policy. Click here to listen to an excellent debate between a Keynesian (Larry Summers) and a Neoclassical economist (John Taylor) on the subject. To download a PowerPoint on the topic, click here (Chapter 35 Notes Page and the Chapter 36 Notes Page).
Mini-lecture
No new lecture today. But if you didn't watch the first mini-lecture this unit, you should do it now (Introduction to Money). It summarizes the ideas of the monetarists and explains how they disagree with Keynesians on monetary policy. Make sure you understand this and also that you understand (and can explain in the AS-AD and Phillips Curve models) how differences in expected and actual rates of inflation cause economic volatility and different economic outcomes in the long-run and short-run.
Assignments
Read Mankiw (Chapter 35 - Start with section on "Shifts in the Phillips Curve and the Role of Expctations" and read to the end; all of Chapter 36) and watch the following videos.
Formative Assessment (MCQ's): You will take a formal assessment during class. The assessment will consist of multiple-choice questions and one FRQ from an old AP Exam. Doing the problem of the day and ensuring that you understand it will help you prepare for today's formative assessment and help to ensure that you understand the concepts in this lesson.
Problem of the Day
Identify the equation used by Monetarists to explain the macroeconomy and the one used by Keynesians.
Use an AS-AD graph to explain why Monetarists advocate the use of a money rule in managing the economy.
Assume that expected inflation is 4% but a negative demand shock causes actual inflation to be 2%.
Using an AS-AD graph and a Phillips Curve graph, explain why Keynesians believe the economy will not recover on its own.
Using an AS-AD graph and a Phillips Curve graph, explain why monetarists (adaptive expectations) believe the economy will eventually recover on its own.
Using an AS-AD graph and a Phillips Curve graph, explain why rational expectations economists believe that the situation above is not possible.