Chapter 33: Aggregate Demand and Aggregate Supply
Archived Posts
September 14
Gordon on Macro
Robert Gordon argues that modern dynamic stochastic general equilibrium models are not relevant to the real world. He suggests a return to a Keynesian model, but one stripped of the short-run Phillips Curve.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”
September 10
How Did Economists Get It So Wrong?
Barry Eichengreen and John Cochrane defend economic theory in the face of the current crisis.
Textbook References:
Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
Pages 751-761 “The Aggregate Supply Curve”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Pages 817-818 “Rational Expectations and the Possibility of Costless Deflation”
Chapter 36 “Five Debates over Macroeconomic Policy”
Judging Downturns II
The discussion of how severe the recession is that strated on September 9 continues.
Textbook References:
Chapter 23 “Measuring a Nation’s Income”
Pages 614-623 “Identifying Unemployment”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
September 9
Judging Downturns
The current recession is not nearly as bad as the Great Depression.
Textbook References:
Chapter 23 “Measuring a Nation’s Income”
Pages 614-623 “Identifying Unemployment”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
September 6
How Large is the Fiscal Policy Multiplier?
Volker Wieland argues that there are no multipliers if people are forward looking.
Textbook References:
Pages 751-761 “The Aggregate Supply Curve”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”
September 3
Krugman on Macro
Paul Krugman argues that most macroeconomists have preferred beauty to truth.
Textbook References:
Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
Pages 751-761 “The Aggregate Supply Curve”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Pages 817-818 “Rational Expectations and the Possibility of Costless Deflation”
Chapter 36 “Five Debates over Macroeconomic Policy”
August 19
Blanchard on the Outlook
Olivier Blanchard notes that in previous banking crises, output does not return to its previous growth path. It remains below it, though the average growth rate returns to what it was.
Textbook References:
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 550-554 “Economic Growth Around the World”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
July 17
Google Searches as an Economic Indicator
The number of Google searches for the phrase “economic depression” is back down to its pre-crisis level. Larry Summers suggests that that is good news.
Textbook Reference:
Page 749 “Shifts Arising from Changes in Investment”
June 18
Deflation?
A graph shows that there has been deflation over the past year, as measured by the CPI. Yet when measured by the median CPI, there has been low inflation.
Textbook References:
Chapter 24 “Measuring the Cost of Living”
Chapter 30 “Money Growth and Inflation”
Pages 746-9 “Why the Aggregate-Demand Curve Slopes Downward”
May 9
Fear Subsides
An index that measures expected stock market volatility has fallen. This suggests that fear has also declined.
Textbook References:
Pages 576-578 “Financial Markets”
Pages 749-751 “Why the Aggregate Demand Curve Might Shift”
May 5
An Overview of the Credit Crisis
There is an article that summarizes how the current crisis started, how it spread and the actions taken to counteract it. There are also links to a large number of articles and videos on the same topics. This should be an especially valuable resource for instructors.
Textbook References:
Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economics Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 26 “Saving, Investment, and the Financial System”
Pages 654-655 “The Financial Crisis of 2008”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”
Apr. 29
Miron on the Financial Crisis
Jeff Miron argues the case for the government to do nothing in response to the financial crisis.
Textbook References:
Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”
Apr. 28
Reis on Macro
There is an hour-long interview with Ricardo Reis. Reis argues that Keynesian models are still useful.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Apr. 27
Instantaneous Deflation as a Macro Solution
Robert Murphy responds to Mankiw’s argument that we need negative interest rates. He points out that Mankiw’s argument for future inflation is logically equivalent to an instantaneous collapse of prices. Mankiw points out that if prices are sticky, that can’t happen.
Textbook References:
Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 755-760 “Why the Aggregate-Supply Curve Slopes Upward in the Short Run”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Apr. 19
A Quick Quiz
Take a quiz made up of questions from past AP tests.
Textbook References:
Pages 4-5 “Principle 1: People Face Trade-offs”
Chapter 12 “The Design of the Tax System”
Pages 589-593 “Policy 3: Government Budget Deficits”
Page 614-619 “How is Unemployment Measured?”
Pages 649-653 “Banks and the Money Supply”
Pages 653-656 “The Fed’s Tools of Monetary Control”
Chapter 30 “Money Growth and Inflation”
Pages 742-744 “The Assumptions of Classical Economics”
Pages 749-751 “Why the Aggregate–Demand Curve Might Shift”
Pages 753-755 “Why the Long–Run Aggregate–Supply Curve Might Shift”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Apr. 5
“Animal Spirits”
Richard Posner reviews the book “Animal Spirits” written by George Akerlof and Robert Shiller. Unsurprisingly, he doesn’t like it.
Textbook References:
Pages 498-499 “This Is Your Brain on Economics”
Page 749 “Shifts Arising from Changes in Investment”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Mar. 24
A Pessimistic Forecast
Carmen Reinhart and Ken Rogoff argue that the recovery will not come as soon or be as vigorous as many policymakers claim.
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Mar. 20
The Direction of Policy
Alan Blinder argues that Obama is not a socialist. Gary Becker and Kevin Murphy think that Obama’s plan may kill capitalism.
Textbook References:
Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”
Mar. 4
The Myth of Economic Recovery
The debate continues about whether the economy is trend stationary.
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Wanna Bet Some of that Nobel Money?
Mankiw offers to bet Paul Krugman about whether the economy is trend sensitive.
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Mar. 3
Team Obama on the Unit Root Hypothesis
Mankiw takes issue with the CEA’s assumption that the economy is trend-stationary.
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Feb. 15
Talking Down the Economy
Bradley Schiller says that the doom and gloom coming out of the Whitehouse is dangerous. Mankiw disagrees.
Textbook References:
Pages 608-609 “Neurofinance”
Page 749 “Why the Aggregate Demand Curve Might Shift”
Feb. 12
Labor Market Conditions
Mankiw presents a graph of initial and continued unemployment claims from January 1971 to January 2009.
Textbook References:
Chapter 28 “Unemployment”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Page 797 “Automatic Stabilizers”
Who Bears the Burden of Downturns?
Jonathan Parker and Annette Vissing-Jorgensen argue that the consumption of high-consumption households fluctuates more than that of low-consumption households.
Textbook References:
Chapter 20 “Income Inequality and Poverty”
Page 515 “The Components of U.S. GDP”
Pages 740-742 “Three Key Facts about Economic Fluctuations”
Feb. 9
Comparing Recessions
There is a graph showing employment trends in the last six recessions.
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Feb. 6
The Mature Keynesian Perspective II
Keynes would’ve approved a cut in the payroll tax now.
Textbook References:
Page 127 “Can Congress Distribute the Burden of a Payroll Tax?”
Pages 243-245 “The Federal Government: Receipts”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Feb. 3
Lessons from Past Crises
There is a link to an Op-ed for the Wall Street Journal written by Carmen Reinhart and Kenneth Rogoff. They compare the current crisis to previous ones around the world.
Textbook References:
Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Feb. 1
Cole and Ohanian on the New Deal
There is a link to an article in the Wall Street Journal that argues that the New Deal did not help end the Great Depression.
Textbook References:
Pages 765-766 “Two Big Shifts in Aggregate Demand: The Great Depression and World War II”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Jan. 27
Shiller on Animal Spirits
Robert Shiller argues that restoring confidence is important.
Textbook Reference:
Pages 608-609 “Neurofinance”
Pages 749-750 “Why the Aggregate Demand Curve Might Shift”
Jan. 26
The Mature Keynesian Perspective
Mario Rizzo points out that even Keynes thought infrastructure spending might take too long.
Textbook References:
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Jan. 21
Barro on Fiscal Stimulus
Robert Barro argues that the proposed stimulus package ignores what have economists have learned since 1936. There is also a link to Paul Krugman’s blog where he chides Barro for misrepresenting Keynes.
Textbook References:
Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 230-232 “The Difficult Job of Cost-Benefit Analysis”
Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 791-792 “The Crowding-Out Effect”
Jan. 13
There is a graph and a link to commentary by Nick Bloom and Max Floetotto. They suggest that uncertainty has declined and the economy will begin to recover soon.
Textbook References:
Page 608-609 “Neurofinance”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Jan. 10
There is a link to Mankiw’s editorial in the New York Times. He points out some of the pitfalls of increased government spending as a way to end the crisis.
Textbook References:
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Dec. 16
1. The Next Round of Ammunition
Mankiw discusses what else the Fed can do, given that interest rates are as low as they can go.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”
Dec. 7
Life in the Left Tail
Mankiw shows a graph of the distribution of stock-market returns from 1825 to the present. 2008 is in the far left tail.
Textbook References:
Pages 577-579 “The Stock Market”
Pages 608-609 “Lessons from the Brain-Damaged Investor”
Pages 609-610 “Market Irrationality”
Page 767 “The Recession of 2001”
Dec. 3
AS, AD, and the New Deal
There is a link to a post by Paul Krugman that analyzes the New Deal in terms of the AS/AD model. Mankiw comments on the post.
Textbook References:
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Dec. 1
The Recession Began December 2007
There is a link to a report from the NBER
Textbook Reference:
Pages 740-742 “Three Key Facts About Economic Fluctuations”
