ECON 204 1st Edition Lecture 18Outline of Last Lecture XXIII. Monetary Policy A. Money multiplierB. More on monetary policyOutline of Current LectureXXIV. History and Alternate Views of MacroeconomicsA. KeynesB. MonetarismC. The Austrian Perspective (Hayek)D. New ApproachesCurrent LectureXXIV. History and Alternate Views of MacroeconomicsMonetarism (Friedman), Austrian School (Hayek), New schools: Rational expectations and Real Business Cycles1933- Norwegian economist Ragnar Frisch created the term “macroeconomics”Classical political economy studied mainly production and allocationMacroeconomics got a political identity after the Great DepressionIncreases in money supply lead to increases in priceA. KeynesJohn Maynard Keynes wrote “The General Theory of Employment, Interest and Money” which details the AD/AS model.Keynes’s contributions:1. He saw a place for government (where they could step in) in the short run.2. Business cycles and when businesses invest. Keynes pointed out that a decrease in AD contributes to recessions/depressions.Looks at what causes spending to change.Monetary policy cuts interest for everyone at the same time and makes the problem more technical rather than political (in contrast to fiscal policy).B. MonetarismMonetarism says you need to predict how money supply could change over time(businesses predicting interaction)Friedman said to put monetary policy on “autopilot”.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Friedman against fiscal policy.MY=PYV= velocity of money (how many times it changes hands in a year)The ration of nominal GDP to the money supplyFriedman assumed velocity was constant but this is untrue. C. The Austrian Perspective (Hayek)Most harsh criticism of the Keynes modelEmphasized freedom rather than government control (Austrian Perspective supports free moneys)Saw government as detrimental and that they infringe on libertyHayek saw fiscal policy as a step towards a totalitarian state. Believed government should not have monopoly over money (production, distribution etc.) and that free banking is a better option. Free banking: multiple banks create individual currencies (like what we have internationally but on a national level)For Hayek it is not the lack of demand that causes unemployment but rather the composition of demand (consumer or investment goods)For Hayek savings = unemploymentHayek said if the economy does not have enough savings the punishment is crisis (recession or depression)Fiscal and monetary policy increase either investment or consumption (reducing savings) – Hayek said these prolong crisisD. New ApproachesRational Experimentation argues that fiscal and monetary policy work unless people are ableto predict the inflation rate because monetary policy loses effect if businesses know what government will do and base investment off that. Monetary policy must come as a shock/surprise to investors in order to have an impact. Real business cycles theory focuses on amount of output you can generate based on certain input factors (the total factor of productivity). Fluctuations in the growth rate of the total factor of productivity cause the business cycle. Originally saw changes in technology as causes of change in AD and looked only at SRAS in terms of