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In macroeconomics, the triangle model employed by new Keynesian economics is a model of inflation derived from the Phillips Curve and given its name by Robert J. Gordon. The model views inflation as having three root causes: built-in inflation, demand-pull inflation, and cost-push inflation. [1] Unlike the earliest theories of the Phillips Curve, the triangle model attempts to account for the phenomenon of stagflation.
Demand-pull inflation occurs to arise when aggregate demand in an economy is more than aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods". More accurately, it should be described as involving "too much money spent chasing too few goods", since only money that is spent on goods and services can cause inflation. This would not be expected to happen, unless the economy is already at a full employment level. It is the opposite of cost-push inflation.
Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.
Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole—for example, using interest rates, taxes, and government spending to regulate an economy's growth and stability. This includes regional, national, and global economies.
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.
IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic tool that shows the relationship between interest rates and assets market. The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves models "general equilibrium" where supposed simultaneous equilibria occur in both the goods and the asset markets. Yet two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when the price level is fixed in the short-run; second, the IS–LM model shows why an aggregate demand curve can shift. Hence, this tool is sometimes used not only to analyse economic fluctuations but also to suggest potential levels for appropriate stabilisation policies.
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.
The Phillips curve is an economic model, named after William Phillips, that predicts a correlation between reduction in unemployment and increased rates of wage rises within an economy. While Phillips himself did not state a linked relationship between employment and inflation, this was a trivial deduction from his statistical findings. Paul Samuelson and Robert Solow made the connection explicit and subsequently Milton Friedman and Edmund Phelps put the theoretical structure in place.
Business cycles are intervals of expansion followed by recession in economic activity. A recession is sometimes technically defined as 2 quarters of negative GDP growth, but definitions vary; for example, in the United States, a recession is defined as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The changes in economic activity that characterize business cycles have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examining trends in a broad economic indicator such as Real Gross Domestic Production.
A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices.
In economics, money illusion, or price illusion, is a cognitive bias where money is thought of in nominal, rather than real terms. In other words, the face value of money is mistaken for its purchasing power at a previous point in time. Viewing purchasing power as measured by the nominal value is false, as modern fiat currencies have no intrinsic value and their real value depends purely on the price level. The term was coined by Irving Fisher in Stabilizing the Dollar. It was popularized by John Maynard Keynes in the early twentieth century, and Irving Fisher wrote an important book on the subject, The Money Illusion, in 1928.
Neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption. Neutrality of money is an important idea in classical economics and is related to the classical dichotomy. It implies that the central bank does not affect the real economy by creating money. Instead, any increase in the supply of money would be offset by a proportional rise in prices and wages. This assumption underlies some mainstream macroeconomic models. Others like monetarism view money as being neutral only in the long run.
Ricardo A. M. R. Reis is a Portuguese economist and the A. W. Phillips professor of economics at the London School of Economics. In a 2013 ranking of young economists by Glenn Ellison, Reis was considered the top economist with a PhD between 1996 and 2004., and in 2016 he won the Germán Bernácer Prize for top European-born economist researching macroeconomics and finance. He writes a weekly op-ed for the Portuguese newspaper Jornal de Notícias and Expresso, and participates frequently in economic debates in Portugal.
The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936). It was formulated most notably by John Hicks (1937), Franco Modigliani (1944), and Paul Samuelson (1948), who dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 60s, and 70s.
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.
The AD–AS or aggregate demand–aggregate supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand (AD) and aggregate supply (AS).
Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.
The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/real business cycle theory and early New Keynesian economics – into a consensus view on the best way to explain short-run fluctuations in the economy. This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics. The new synthesis provides the theoretical foundation for much of contemporary mainstream macroeconomics. It is an important part of the theoretical foundation for the work done by the Federal Reserve and many other central banks.
Disequilibrium macroeconomics is a tradition of research centered on the role of disequilibrium in economics. This approach is also known as non-Walrasian theory, equilibrium with rationing, the non-market clearing approach, and non-tâtonnement theory. Early work in the area was done by Don Patinkin, Robert W. Clower, and Axel Leijonhufvud. Their work was formalized into general disequilibrium models, which were very influential in the 1970s. American economists had mostly abandoned these models by the late 1970s, but French economists continued work in the tradition and developed fixprice models.
Full Employment Abandoned: Shifting Sands and Policy Failures is a book on macroeconomic issues written by economists Bill Mitchell and Joan Muysken and first published in 2008.
A Calvo contract is the name given in macroeconomics to the pricing model that when a firm sets a nominal price there is a constant probability that a firm might be able to reset its price which is independent of the time since the price was last reset. The model was first put forward by Guillermo Calvo in his 1983 article "Staggered Prices in a Utility-Maximizing Framework". The original article was written in a continuous time mathematical framework, but nowadays is mostly used in its discrete time version. The Calvo model is the most common way to model nominal rigidity in new Keynesian DSGE macroeconomic models.
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