Truman vetoed a 1948 Republican-sponsored tax cut aimed at stimulating the economy after World War II (Congress, however, overrode the veto), and Eisenhower resisted stimulative measures to deal with the recessions of 1953, 1957, and 1960. Much of the difficulty policy makers encountered during the decade of the 1970s resulted from shifts in aggregate supply. As shown in Panel (a) of Figure 17.6 "The Two Faces of Expansionary Policy in the 1960s", the expansionary fiscal and monetary policies of the early 1960s had pushed real GDP to its potential by 1963. 19.
5. Events did not create the new ideas, but they produced an environment in which those ideas could win greater support. The experience of the 1970s, in which changes in aggregate supply forced changes in real GDP and in the price level, seemed consistent with the new classical economistsâ arguments that focused on aggregate supply. The administration dealt with the recession by shifting to an expansionary fiscal policy.
As for McKee’s absurd claim that Kennedy planned on deficit spending to expand the government’s foot print? Friedmanâs notion of the natural rate of unemployment buttressed the monetarist argument that the economy moves to its potential output on its own. A Study of Federal Grants and Retail Sales During the Great Depression, JIMMY CARTER, BILL CLINTON, AND THE NEW DEMOCRATIC ECONOMICS. Any of these policies will increase the deficit or reduce the surplus.
The monetarist school holds that changes in the money supply are the primary cause of changes in nominal GDP. Following the global financial crisis of 2007–08 and the ensuing Great Recession, interest in ongoing theoretical refinements of Keynesian economics (so-called “new Keynesianism”) increased, in part because Keynesian-inspired responses to the crisis, where they were adopted, proved reasonably successful. Both are implications of the rational expectations hypothesis, which assumes that individuals form expectations about the future based on the information available to them, and that they act on those expectations. The administrations of Presidents Roosevelt, Truman, and Eisenhower rejected the notion that fiscal policy could or should be used to manipulate real GDP. For monetarists, the complexity of economic life and the uncertain nature of lags mean that efforts to use monetary policy to stabilize the economy can be destabilizing. For them, there is only economics, which they regard as the analysis of behavior based on individual maximization. That, of course, is precisely what happened in 1970 and 1971. Mr. Mills now endorsed the measure. Monetarists generally argue that the impact lags of monetary policyâthe lags from the time monetary policy is undertaken to the time the policy affects nominal GDPâare so long and variable that trying to stabilize the economy using monetary policy can be destabilizing. Keynesians could point to expansions in economic activity that they could ascribe to expansionary fiscal policy, but economic activity also moved closely with changes in the money supply, just as monetarists predicted. They joined other leading, “public intellectual” economists like John Kenneth Galbraith, Kermit Gordon, and Arthur Okun. DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators. Classical economists stressed the long run and thus the determination of the economy’s potential output. On the relationship between the discretionary public works proposal and the discretionary tax cut plan, which never appeared likely to pass the Congress, see Heller, Walter W. to JFK, “Memorandum for the President: The Power to Untax Is the Power to Create,” 22 January 1962, in Walter W. Heller Personal Papers (#108), John F. Kennedy Presidential Library, Box 010. Figure 17.5 “The Economy Closes an Inflationary Gap” tells the story—it is a simple one. 95. That confuses the real issues and delays the day when they can be sensibly tackled.” Wall Street Journal, 27 March 1962, 12. The word “coordination” was dropped from the bill’s title later in the legislative session as House Democratic leaders scrapped plans to funnel monies through a new coordinating agency, relying instead on the recently established Area Redevelopment Administration. Two particularly controversial propositions of new classical theory relate to the impacts of monetary and of fiscal policy. For them there is no macroeconomics, nor is there something called microeconomics. That triumph turned into a series of macroeconomic disasters in the 1970s as inflation and unemployment spiraled to ever-higher levels. holds that changes in the money supply are the primary cause of changes in nominal GDP. Monetary policy can affect output, but only if it takes people by surprise.
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