Pure neoclassical: Blanchard & Meyer: Keynes & Kalecki:
Wage and price flexibility and having all saving spent on investment gets the economy to the full employment level of national income (Y). Actual Y may not = potential Y (which is called Yn) in the short-run due to inertia in changes in wages and prices. Y is determined by aggregate demand (AD). Y moves due to investment cycles and policy actions. Wages and prices, or their rates of change, may be sticky, but the only thing that has an effect on Y is mark-up rigidity.
Inflation (π) is due to money growth exceeding output growth. If Y > Yn, we will have accelerating inflation (πt > πt-1). The price level is determined by costs but moves with AD as that affects demand-determined prices which feed into costs which leads to money wage increases, etc.
We should use monetary policy to try to get to Y = Yn and π = πT (the inflation target) in the medium-run, even though getting there is not easy and is going to take some time. Fiscal and monetary policy should fight unemployment, but this will lead to inflation, and then fighting inflation will cause unemployment.
Your assignment is to explain what is given in columns 2 and 3 above. That is, tell why the ideas proposed by Blanchard and Meyer, one the one hand, and by Keynes and Kalecki, on the other hand, give us the results found in each cell in columns 2 and 3.
The answers to this for Blanchard and Meyer are similar to the answers for parts of the questions on our second exam. I have attached to this message a copy of the answer key for the second exam. The answers for Keynes and Kalecki can be found in two handouts I gave out earlier and in the lectures I gave this week and last week about investment spending and the Peterson reading on financing investment that I sent to you all last week.
The answers are due to me by e-mail by midnight on Tuesday, June 5. Be as thorough as possible in presenting points that provide correct and thorough answers, but don’t go off into providing information that is not specifically pertinent to a question. I should be available in my office on Friday, June 1, from 3:00 to 6:00 PM, and on Monday, June 4, from 4:00 to 7:00 PM, and by e-mail at other times to answer questions of clarification.
