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Chapter 33: Aggregate Demand and Aggregate Supply

Recent Posts
(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

December 18

If my favorite textbook has not simplified things enough for you...

The recent recession is explained in the style of a children's book.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

October 19

John Taylor versus Paul Krugman

The conventional wisdom is that recoveries from recessions caused by financial crises are typically slow. John Taylor disputes that claim; Paul Krugman supports it.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

October 17

Russ Roberts talks with John Taylor

Roberts and Taylor discuss why the current recovery has been so weak. They conclude that bad policy is to blame.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

September 6

The Case for Big Banks

Phillip Swagel argues that breaking up big banks will make them too small to succeed and that the business will flow overseas and to the shadow banking system. He says that the Dodd-Frank financial-reform law takes care of the "too-big-to-fail" problem.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

June 22

Anna Schwartz has passed away

The New York Times presents an obituary of an influential economic historian of the Great Depression.

Textbook References:

Pages 744-745 “Two Big shifts in Aggregate Demand: The Great Depression and World War II”

May 22

Are mortgage writedowns the answer?

Ted Gayer and Phillip Swagel argue that the government should not reduce the mortgage principal of people who owe more on their mortgage than their house is worth. It also should not refinance them at lower interest rates. Gayer and Swagel contend that it will cost taxpayers a significant amount of money, provide perverse incentives, and will not solve the housing crisis.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

May 12

Geanakoplos on the Leverage Cycle

In a 55-minute video, John Geanakoplos discusses the role of leverage in recent economic crises. He also suggests ways to reduce the problem in the future.

Textbook References:

Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”

May 4

True Lessons of the Recession

Raghuram Rajan argues that the real lesson of the recent recession is that we must improve education and training, encourage entrepreneurship, and improve but not "lobotomize" the financial system.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”

April 7

Monitoring the So-called Recovery

A graph from the Bureau of Labor Statistics shows a sharp decline in the U.S. employment-to-population ratio since 2008.

Textbook References:

Pages 594-598 “How Is Unemployment Measured?”
Pages 745-748 “The Recession of 2008-2009”

March 16

How to Teach Aggregate Supply Shocks

Nick Rowe discusses the difficulties of teaching short-run aggregate supply shocks. Mankiw points readers to one of his own papers.

Textbook References:

Pages 738-740 “Why the Short-Run Aggregate-Supply Curve Might Shift”

March 15

A Profile of Ben Bernanke

Roger Lowenstein defends Bernanke's actions in the recent financial crisis.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

March 13

The Limits of Monetary Policy

Brad DeLong argues that stabilization policy cannot always depend on monetary policy alone. Fiscal policy is also sometimes necessary.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

January 12

Judging Presidents

Presidents have far less influence on job creation than many people believe.

Textbook References:

Chapter 28 “Unemployment”
Chapter 33 “Aggregate Demand and Aggregate Supply”

January 3

The Reincarnation of Keynesian Economics

Is New Keynesian economics really Keynesian? Scott Summers thinks not.

Textbook References:

Page 751 “The Origins of the Model of Aggregate Demand and Aggregate Supply”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

November 12

Supply-side Policies as a Way to Boost Aggregate Demand

A paper from researchers at the Philadelphia Fed argues that structural reforms that increase productivity can also boost aggregate demand via a wealth effect.

Textbook References:

Pages 726-731 “The Aggregate-Demand Curve”

November 7

What would John Maynard Keynes have said about Obamacare?

Keynes argued that even necessary reforms might upset business confidence and slow recovery.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 729-731 “Why the Aggregate-Demand Curve Might Shift”

October 29

My Lecture at Princeton

An hour-long video shows Mankiw's recent lecture at Princeton. In a wide-ranging presentation, he discusses the current state of macroeconomics. In the process he addresses the policy difficulties created by the current slump and the long-term debt crisis.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Page 561 “Financial Crises”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”

October 27

The Budget Deficit

In a 90 minute video, Peter Diamond, Jeff Leibman, Deborah Lucas, Greg Mankiw, and Robert Solow discuss the federal budget deficit. The discussion addresses both short-term and long-term concerns.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”
Pages 823-827 “Should the Government Balance Its Budget?”

October 19

The Latest from Merle Hazard

Merle Hazard performs a song about "too-big-to-fail" banks.

Textbook References:

Pages 272-273 “Economies and Diseconomies of Scale”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”

October 8

Policy Uncertainty

Scott Baker, Nicholas Bloom, and Steven Davis argue that policy uncertainty is hurting the recovery. Sources of policy uncertainty include U.S. and European debt problems, the legal status of the recent health-care legislation, and mixed signals about future tax laws.

Textbook References:

Pages 729-730 “Why the Aggregate-Demand Curve Might Shift”

September 28

Peter Diamond on Stimulus

Peter Diamond discusses the need for more economic stimulus in a 24- minute interview.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

September 24

A Conversation with Robert Lucas

Robert Lucas talks about the effects of high marginal tax rates on growth, about the recent financial crisis, and about rational expectations.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Page 561 “Financial Crises”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”
Pages 789-795 “Shifts in the Phillips Curve: The Role of Expectations”

September 20

The Case for More Quantitative Easing

Joe Nocera argues that the problem with the economy is a lack of credit. He therefore argues for another round of quantitative easing.

Textbook References:

Pages 745-746 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”

September 14

Hayek and Keynes

An Excerpt from Silvia Nasar's book The Grand Pursuit: The Story of Economic Genius discusses Keynes and Hayek.

Textbook References:

Pages 10-11 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 342 “Galbraith versus Hayek”
Page 751 “The Origin of the Model of Aggregate Demand and Aggregate Supply”
Pages 773-779 “Using Policy To Stabilize The Economy”

September 10

Fixing Our Sick Economy

Two essays, one by Mankiw and the other by Robert Barro, address the causes of the weak recovery, and suggest possible solutions.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 250-251 “Who Pays the Corporate Income Tax?”
Pages 250-251 “The Value-Added Tax”
Page 568 “Policy 2: Investment Incentives”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”

September 4

Reflections of a Former Student

The British shadow chancellor discusses the real Keynes, not the caricature.

Textbook References:

Page 751 “The Origins of the Model of Aggregate Demand and Aggregate Supply”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

August 30

Glaeser on Mortgage Modification

A recent proposal would allow people with government-backed mortgages to refinance them at today's lower interest rates. Proponents claim it is a cost-free way to boost the economy. Edward Glaeser argues that it will not boost the economy and it will cost taxpayers a lot of money.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”

August 21

Split-Rated

Curtis Threadneedle (a.k.a. Merle Hazard) sings a humorous song about the downgrade in the U.S. credit rating.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 570-572 “The History of U.S. Government Debt”

August 9

I Talk to Larry Kudlow

Mankiw discusses what the Fed might do to boost the weak recovery and avoid a double-dip recession.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”

August 8

I Talk to Reuters

Mankiw discusses the current U.S. debt crisis and what the Fed can do to boost the weak recovery.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Page 561 “Financial Crises”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”

August 6

Federal Nondefense Spending (as a % of GDP)

A chart from the Bureau of Economic Analysis shows how Federal nondefense spending as a share of GDP has risen sharply in the past few years.

Textbook References:

Pages 234-241 “A Financial Overview of the U.S. Government”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

August 6

Former Fed Officials Opine

A 27-minute video shows three former Fed officials discussing what the Fed can do to support the weak recovery.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”

August 4

Rogoff on the Great Contraction

Kenneth Rogoff argues that it is wrong to compare the recent recession to a typical recession. The real issue is that the world economy is badly overleveraged, and "and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."

Textbook References:

Page 561 “Financial Crises”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”

July 21

The Subprime Mortgage Crisis

Christopher Foote and Paul Willen examine two different theories of why the subprime mortgage crisis occurred.

Textbook References:

Pages 468-473 “Asymmetric Information”
Pages 480-481 “People Aren't Always Rational”
Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

July 12

GSE Fact of the Day

By 2008 half of all mortgages were excessively risky, and government sponsored enterprises such as Fannie Mae owned 12 million out of 27 million such loans.

Textbook References:

Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

July 8

The Disappointing Recovery

A chart shows that the civilian employment to population ratio remains roughly 5 percentage points below its pre-recession level.

Textbook References:

Pages 598-599 “Does the Unemployment Rate Measure What We Want It To?”
Pages 720-722 “Three Key Facts about Economic Fluctuations”
Pages 745-748 “The Recession of 2008-2009”

July 1

Housing Tax Subsidies

The preferential tax treatment of owner-occupied housing distorts capital allocation in the U.S. economy.

Textbook References:

Pages 6-7 “Principle 3: Rational People Think at the Margin”
Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 745-748 “The Recession of 2008-2009”

June 30

Economist as Movie Reviewer

Economist Phillip Swagel critiques two movies about the recent financial crisis.

Textbook References:

Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

June 2

Lucas on the Great Recession

Robert Lucas discusses the recent recession in an historical context. He worries that the government is now doing too much.

Textbook References:

Pages10-11 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 11-13 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 744-745 “Two Big Shifts in Aggregate Demand: The Great Depression and World War II”
Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

May 31

Household Expectations

The recent recession created an unusual amount of consumer pessimism.

Textbook References:

Pages 749-751 “Why the Aggregate-Demand Curve Might Shift”

May 13

Evaluating the ARRA

Tom Conley and Bill Dupor argue that the recent fiscal stimulus (the American Recovery and Reinvestment Act) actually destroyed more jobs than it saved.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 560-572 “Economic Growth and Public Policy”
Page 750 “The 2008 Fiscal Stimulus”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”

May 7

Macroeconomic Uncertainties

Mankiw discusses three macroeconomics questions that perplex him. He also emphasizes the importance of humility for macroeconomists.

Textbook References:

Page 740 “Fact 1: Economic Fluctuations are Irregular and Unpredictable”
Pages 760-761 “Why the Short-Run Aggregate-Supply Curve Might Shift”

April 16

My Talk From Yesterday

A video shows Mankiw's talk at the University of Cincinnati. He provides a brief history of macroeconomics, discusses current monetary and fiscal policy, and discusses the long-run fiscal situation.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 539-541 “Real and Nominal Interest Rates”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 654-655 “The Financial Crisis of 2008”
Page 750 “The 2008 Fiscal Stimulus”
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 842-843 “Dealing with Deficits”

April 2

A V, 2 Us, and an L

The U.S. Department of Labor presents a graph of the civilian employment to population ratio.

Textbook References:

Pages 614-623 “Identifying Unemployment”
Pages 740-742 “Key Facts About Economic Fluctuations”

March 16

The Chinese Currency Question

Paul Krugman argues that China is hurting the global economy by undervaluing its currency. Mankiw disagrees.

Textbook References:

Pages 703-706 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 747-748 “The Price Level and Net Exports: The Exchange-Rate Effect”
Page 778 “The Exchange Rate Effect”

March 15

Shiller's Prognosis

Robert Shiller argues that economic crises are hard to predict because macroeconomic knowledge is so limited.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”

February 25

MIT Symposium

A 2-hour video presents a wide-ranging discussion of macroeconomic issues. Participants are Olivier Blanchard, Pedro Aspe, Robert Gordon, Paul Krugman, Greg Mankiw, and Christina Romer.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 654-655 “The Financial Crisis of 2008”
Chapter 32 “A Macroeconomic Theory of the Open Economy”
Page 750 “The 2008 Fiscal Stimulus”
Pages 778-787 “Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

February 12

Jobs, Jobs, Jobs

Should the government embrace anything that creates jobs, or should it consider the long-run value of its projects?

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 25-28 “Our Second Model: The Production Possibilities Frontier”
Page 742 “Fact 3: As Output Falls, Unemployment Rises”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

January 28

NPR reports...

National Public Radio reports on discussions held at M.I.T. about the financial crisis and what can be done now to help the economy. The participants were not optimistic about the near term.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 750 “The 2008 Fiscal Stimulus”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”

October 23

Goolsbee, Deconstructed

Keith Hennessey comments on Austin's Goolsbee's assertions about recent economic policy and performance.

Textbook References:

Pages 34-36 “Why Economists Disagree”

Pages 654-655 “The Financial Crisis of 2008”

Page 750 “The 2008 Fiscal Stimulus”


October 18

Hear Me Squawk

Mankiw discusses a variety of issues including marginal tax rates, long-term deficits, and ways to stimulate the economy.

Textbook References:

Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Page 399 “The Trade-off Between Work and Leisure”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 749-751 “Why the Aggregate-Demand Curve Might Shift”
Page 750 “The 2008 Fiscal Stimulus”
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 842-843 “Dealing with Deficits”

October 3

The Debate Over Fiscal Adjustment

The conventional wisdom is that a fiscal contraction will cause GDP to contract in the short run. Yet spending cuts that restore confidence that deficits are not out of control might not have an adverse effect on GDP.

Textbook References:

Pages 749-751 “Why the Aggregate-Demand Curve Might Shift”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

July 21

Harvardians in the FT

Kenneth Rogoff argues against more fiscal stimulus. Lawrence Summers supports short-term stimulus combined with medium and long-term deficit reduction. Niall Ferguson argues that Keynesian policies are misguided.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 750 “The 2008 Fiscal Stimulus”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 842-843 “Dealing with Deficits”

July 16

Median Duration of Unemployment

The Bureau of Labor Statistics reports that the median duration of unemployment in this recession is much higher than in previous recessions.

Textbook References:

Page 621-622 “How Long Are the Unemployed Without Work”
Pages 740-742 “Three Key Facts About Economic Fluctuations”

July 14

The CEA's Impossible Job

The Council of Economic Advisors to the President is charged with counting the number of jobs created by the fiscal stimulus. It's an impossible task.

Textbook References:

Pages 30-33 “The Economist as Policy Advisor”

Page 750 “The 2008 Fiscal Stimulus”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

Pages 793-797 “Using Policy To Stabilize The Economy”


July 6

An Interview with Bob Hall

A wide-ranging interview with Robert Hall touches on a variety of topics.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 566-567 “Property Rights and Political Stability”
Pages 604-605 “The Trade-Off Between Risk and Return”
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 793-797 “Using Policy To Stabilize The Economy”

June 27

Links

There are five links sent in by readers. Four of them are humorous, but one, "Ten Commandments for Fiscal Adjustment," is serious.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 560-572 “Economic Growth and Public Policy”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 750 “The 2008 Fiscal Stimulus”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

June 26

My Latest

Mankiw discusses the difficulties faced by the President's economic team in diagnosing and treating the economic crisis. He suggests that macroeconomists need to be humble.

Textbook References:

Pages 30-33 “The Economist as Policy Advisor”

Page 750 “The 2008 Fiscal Stimulus”

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?”


May 9

Ferguson on Posner

Niall Ferguson reviews Richard Posner's new book, The Crisis of Capitalist Democracy. Posner argues that Congress is trying to fix the financial system without fully understanding it. He also points out that by attacking bankers, politicians are distracting attention away from their own role in the current crisis.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Page 750 “The 2008 Fiscal Stimulus”

Pages 830-832 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy”


April 17

The Latest from the CEA Chair

CEA Chair Christina Romer reports on what has been done to fight the current recession and discusses what else can be done.

Textbook References:

Pages 30-33 “The Economist as Policy Advisor”

Pages 246-248 “The Fiscal Challenge Ahead”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 654-655 “The Financial Crisis of 2008”

Page 750 “The 2008 Fiscal Stimulus”

Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”

Pages 830-832 “Monetary And Fiscal Policymakers Try To Stabilize The Economy”

Pages 842-843 “Dealing with Deficits”


April 2

Barro on the Great Depression

Robert Barro questions the Keynesian multiplier and suggests that Friedman and Schwartz had a better understanding of the Great Depression than Keynes.

Textbook References:

Page 657 “Bank Runs and the Money Supply”
Pages 767-766 “Two Big Shifts in Aggregate Demand: The Great Depression and World War II”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
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?”

April 2

Keynes: Economics as Impressionism

Sir John Hicks suggests that The General Theory is best viewed in the same way as an Impressionist painting: The details may be ugly but the overall picture is worth seeing.

Textbook References:

Page 770 “The Origins of Aggregate Demand and Aggregate Supply”

March 16

The Chinese Currency Question

Paul Krugman argues that China is hurting the global economy by undervaluing its currency. Mankiw disagrees.

Textbook References:

Pages 703-706 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 747-748 “Price Level and Net Exports: The Exchange-Rate Effect”
Page 778 “The Exchange Rate Effect”

Chapter 33: Aggregate Demand and Aggregate Supply
Archived Posts

 

March 15

Shiller's Prognosis

Robert Shiller argues that economic crises are hard to predict because macroeconomic knowledge is so limited.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”

February 9

Imperfect Information and Aggregate Supply

Mankiw posts a paper that he wrote with Ricardo Reis about the link between imperfect information and the positive slope of the short-run aggregate- supply curve.

Textbook References:

Pages 755-760 “Why the Aggregate-Supply Curve Slopes Upward in the Short Run”

January 25

Hayek vs Keynes Rap

There is a short video of a rap song that presents the differences between Keynes and Hayek.

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 358 “Galbraith versus Hayek”
Page 750 “The 2008 Fiscal Stimulus”
Page 770 “The Origins of 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?”

December 26

Smoot-Hawley Revisited

Scott Sumner argues that the Smoot-Hawley tariffs of 1930 crushed an incipient recovery and may have been a main reason for the Great Depression's severity.

Textbook References:

Page 183-185 “The Effects of a Tariff”
Pages 765-766 “Two Big Shifts in Aggregate Demand: The Great Depression and World War II”


October 22

From the CEA Chair

Christina Romer discusses the economic crisis, the policy response, and the outlook for the future.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Pages 664-676 “The Classical Theory of Inflation”
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 25

Back from the Brink

Christina Romer, chair of the President’s Council of Economic Advisors, discusses the parallels between the crises of 1929 and 2008. She argues that the policy response to the current crisis has been much better than the response in 1929.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
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 24

Posner on Keynes

Richard Posner discusses why he became a Keynesian after reading The General Theory.

Textbook Reference:

Pages 609-610 “Market Irrationality”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 779-781 “The Theory of Liquidity Preferences”
Pages 794-795 “The Case for Active Stabilization Policy”


September 20

Book Review

Mankiw reviews Robert Skidelsky’s new book, “Keynes: the Return of the Master.”

Textbook Reference:

Pages 609-610 “Market Irrationality”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 779-781 “The Theory of Liquidity Preferences”
Pages 794-795 “The Case for Active Stabilization Policy”


September 19

Levine on Macro

David Levine accuses Paul Krugman of ignoring advances in modern macroeconomics.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
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 17

Kocherlakota on Macro

Narayana Kocherlakota makes ten claims about the state of modern macroeconomics.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 606-610 “Asset Valuation”
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 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”