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PM Lecture 4: Keyes and Hayek

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Boston University
CAS EC 102
Jay Zagorsky

PM Lecture #4: Keyes and Hayek Tuesday, March 25, 2014 3:31 PM John Maynard Keyes and F. A. Hayek - During the "Great Recession" gov'ts around the world did unprecedented actions ○ US bailed out GM, AIG and Fannie Mae ○ Pushed short term interest rates to 0 ○ Extended time to collect UI benefits ○ Goal was to ensure unemployment did not get out of control - The gov't has 3 choices it can take when economy slows down ○ Monetary Policy  Central bank has the ability to change the money supply and interest rates, these actions impact the economy in the short run ○ Fiscal Policy  Gov't can change its taxes and expenditure polices, these actions have a large impact on the economy in the medium run ○ Do nothing - Opposing ideas have 2 champions ○ John Maynard Keynes: Idea that gov't intervention was good  "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselvestoo easy, too useless a task if in tempestuous seasons they can only tell us when the storm is long pact, the ocean will be flat."  The General Theory of Employment, Interest and Money □ Fundamental relationships and ideas behind what became known as macroeconomics □ Markets do not clear and prices are not flexible in the short run □ Due to this inflexibility, unemployment arises and society can be stuck in a sub- optimal state □ In periods when the economy is stuck, gov't intervention using fiscal and monetary policies can eliminate reces
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