ECON 2200 Lecture Notes - Lecture 49: Monetarism, Money Supply, Interest Rate
14 May 2018
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ECON 2200
Lecture 49
• The role of government spending (Table 23.3)
o AD = C+I+G+(X-IM)
o Keyes believed they should increase G and/or decrease taxes
(fiscal policy)
→ This would increase C and I
→ Keyes is misrepresented as a big government spending
and has been associated with “big government”; however,
Keyes was explicit that this policy should be used only
during periods of periods of recession or depression.
→ Recall: Congress and the President control fiscal policy
(changes in government spending and taxes); Fed
controls monetary policy (changes in the money supply,
interest rate, etc.)
o Did government spending during the 1930s expand sufficiently
to counteract the decrease in AD? (Table 23.3)
→ 1927: I = 14.5 billion / Fed G = 2.9 / Local G = 7.8
→ 1932: I = 3.4 / Fed G = 4.8 / Local G = 8.4
→ The amount of government spending did not make up for
the decrease in I. The Federal government started some
deficit spending (spend more than their revenue), but not
by much. Also, the local government was actually
running a surplus (spending less than their revenue).
• Economic Insight 23.1: Temin’s Critique of Monetarists
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Document Summary
Lecture 49: the role of government spending (table 23. 3, ad = c+i+g+(x-im, keyes believed they should increase g and/or decrease taxes (fiscal policy) Keyes is misrepresented as a big government spending and has been associated with big government ; however, Keyes was explicit that this policy should be used only during periods of periods of recession or depression. 1927: i = 14. 5 billion / fed g = 2. 9 / local g = 7. 8. 1932: i = 3. 4 / fed g = 4. 8 / local g = 8. 4. The amount of government spending did not make up for the decrease in i. The federal government started some deficit spending (spend more than their revenue), but not by much. Interest rate data (table 23. 2, col 4 &5: difference in the which rate matters. Keynesians believe that it is the nominal rate that matter and people look at. Monetarists says people really look at the real interest rate.
