Week 8: Monetary & Fiscal Policy II Flashcards
(15 cards)
How did Keynesian economics challenge neoclassical views on unemployment?
Keynes argued that demand drives employment, not just wage adjustments. Governments must intervene via fiscal/monetary policy to stimulate demand.
What are the two main tools of Keynesian policy?
- Fiscal Policy: Taxes and government spending. 2. Monetary Policy: Interest rates (controlled by central banks).
What does the IS-LM model represent?
IS Curve: Shows how higher interest rates reduce output (investment falls). LM Curve: Reflects equilibrium in financial markets (interest rates vs. money supply).
What did the original Phillips Curve (1958) propose?
A trade-off between unemployment and inflation: lower unemployment → higher inflation, and vice versa.
What is the Accelerationist Hypothesis (Friedman)?
Attempting to keep unemployment below its natural rate (NAIRU) causes accelerating inflation due to adjusted expectations (wage-price spiral).
Why did the Phillips Curve collapse in the 1970s?
Policymakers ignored inflation expectations. Workers demanded higher wages, spiraling inflation without sustained employment gains.
What is a flat Phillips Curve?
Modern phenomenon where unemployment changes barely affect inflation due to: Anchored inflation expectations, globalization/technology suppressing wages, central bank credibility.
How do central banks view the Phillips Curve today?
Mixed opinions: Some call it “dead” (weak inflation-unemployment link). Others argue it’s still useful for policy analysis (e.g., John Williams, NY Fed).
What ended the dominance of Keynesian policies?
1970s stagflation (high inflation + unemployment) proved demand management ineffective. Shift to monetarism (e.g., Thatcher’s policies).
Did COVID-19 revive Keynesian thinking?
Temporarily (e.g., stimulus packages), but neoliberal policies returned post-crisis (LSE Blog).
What recent lesson did inflation post-pandemic teach?
Job markets resisted interest rate hikes. Real incomes rose, but consumer perception lagged (saving more). EU vs. US inflation responses differed.
Define NAIRU.
Non-Accelerating Inflation Rate of Unemployment – the “natural” unemployment rate where inflation stabilizes.
What is a wage-price spiral?
Workers demand higher wages due to inflation → firms raise prices → cycle repeats, accelerating inflation.
Who proposed the Accelerationist Hypothesis?
Milton Friedman (1968).
Which economist argued for Embedded Liberalism in trade?
John Ruggie (1982) – not in this lecture, but linked to earlier trade topics.
