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  • Illustration Available macro-economics.

  • Amazon

  • Chapter 3, “Economics that have Moved the Times,” is a good overview of the currents as it is explained in chronological order.

  • Neoclassical Microeconomics v.s. Keynes School Macroeconomics → Cessation by Hicks.

  • 1961-1963 Kennedy Administration + Keynesians → full employment

  • 1963-1969 Johnson Administration: Medicare

    • Vietnam war
    • Government spending at full employment leads to inflation.
  • 1969-1974 Nixon Administration

    • 1971 Dollar shock + price wage freeze treatment + 10% surcharge on imports
    • 1973 Oil crisis
    • Inflation has not stopped despite the recession stagflation.
    • Keynesian cannot cope with stagflation because it is an aggregate demand management policy
    • Inflation expanded until 1982, tripling prices in 17 years (6.5% per annum).
  • A New Wave of Keynesian Discreditation - monetarism - Milton Friedman (1912-2006) - freedom of choice 1977 - Keynesians went too far and went beyond the natural unemployment rate to full employment. - That policy causes inflation. - money illusion, not realizing that inflation is causing real reductions. - Monetary illusion: a 5% increase in payroll with 10% inflation is a reduction in real terms, but is mistakenly thought to be an increase - Monetary illusion - Wikipedia - The result is a reduction in real terms and an increase in nominal terms, with an increase in supply thinking it is an increase. - When it is widely understood that inflation is occurring? - Phillips curve - Rigidity in nominal wages prevents salaries from increasing at the same rate as inflation - The resulting inflationary increase would effectively reduce salaries. - The volume of employment increases (if not at full employment) in response to lower labor prices - But inflation at full employment will not add any more jobs. - And? - rational expectations hypothesis - Lucas. - People try to act rationally by factoring in future inflation expectations (forecasts)

  • Relatively new idea - theory of games : Because of conflicting interests of people, even if each individual makes a rational decision based on his or her own interests, the whole may fall into a suboptimal solution. - behavioral economics : People’s decisions are not rational to begin with. - information asymmetry : → contract theory


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