ECON 102 Lecture Notes - Lecture 2: Keynesian Economics, Adaptive Expectations, Monetarism
Document Summary
Hicks (1936) created is-lm framework to explain keynes idea, downplayed focus assigned to financial markets. > hicks" ideas eliminated financial markets, focused on consumption choices. > is = investment savings, lm = liquidity preference-money supply. = how aggregate markets for real goods and financial markets interact to balance the interest rate and total output. = explains how changes in market preferences alter gdp eq/ market interest rates. = not very precise, can"t be used for economic policy. Changes in ad driven by external changes in consumption (not investment) > decision to consume follows reasons to invest. > highlights more job volatility than investment volatility. Crises due to expansionary monetary policies (eg. low interest rates) -> misallocation of resources. Minimises role of financial systems in creating aggregate demand volatility. Money is a medium of exchange, so monetary policy only affects investment through interest rates. Main source of business cycles = monetary policies by central banks.
