Class notes ECONOMIC 2152

 Teaching Goals Physics has so far failed to provide a unified theory to explain all physical phenomena. Economics is even further away from achieving such a goal. Keynesian models, while still popular among many policymakers, do not do a very good job of explaining the source and the mechanism by which the typical business cycle comes to pass. Although business cycles are remarkable similar, they are not identical, and they appear to have multiple causes. Equilibrium theorists have proposed a number of business cycle explanations that are based upon microeconomic principles and need not rely on markets failing to equilibrate. Interestingly, in contrast to the most basic of classical models, these models often admit a constructive role for macroeconomic policymaking. The real business cycle model emphasizes the point that shocks to total factor productivity are persistent, and that business cycles may represent the optimal response to such shocks. The segmentation markets model realizes that not everyone participates in financials markets and thus some agents are primarily effected by open market operations. The coordination failure model recognizes the possibility that strategic complementarities generate a kind of externality in production. While all of these considerations may, to a greater or less extent, be important factors in macroeconomic performance, a model that simultaneously considered all of these possibilities would be too unwieldy to provide coherent insights. Nevertheless, all of the possibilities of these models shed light on some causes and means of propagating business cycles.  Classroom Discussion Topics The material in this chapter concludes the study of business cycle phenomena and macroeconomic stabilization policy. At this point it may be useful to revisit students’ original thoughts and prejudices about the proper role of government policy. With so many competing models, how would the students run monetary and fiscal policy if it were their job to do so? Does macroeconomics offer too many competing models and too many points of view? It can be helpful to point out that there is no consensus among macroeconomists on this issue. Should policy be used on a routine basis to fine-tune the economy? Should policymakers simply try to avoid significant fluctuations in the policy instruments? Should aggressive policy measures be employed against very serious shocks like the Great Depression? .................................CONTINUED..............................................