the experience of the 1970’s led keynesian economists to understand that monetary policy was:


The 1960s had demonstrated two important lessons about Keynesian macroeconomic policy. ... After the 1970's stagflation, Keynesian economists now understand that when it comes to aggregate supply, policy responses in that type of economic scenariO O were more successful when using a contrac, Question 1: The natural rate of unemployment and adaptive expectations Suppose the Phillips curve is represented by: E--U Remembering that the natural rate of unemployment is the medium rate of unempl, The experience of the 1970's led Keynesian economsts to understand that monetary policy was You were Incorrect O less effective than previously believed rarely effective more effective than previously, In theory with flexible exchange rates should allow countries to The Modern View on Monetary Policy: The modern monetary economists’ reject the Keynesian view that the link between the supply of money and output is the rate of interest. saying that economic decision makers are always confronted by uncertainty – the past isn't a reliable predictor of the future).[2]. The body of macroeconomic thought that holds that changes in the money supply are the primary cause of changes in nominal GDP. ", Lord Skidelsky has written that Keynes's motivation for the revolution arose from the failure of the British economy to recover from its post World War I recession in the manner predicted by classical economics – throughout the 1920s British unemployment remained at historically high levels not previously seen since a brief period in the aftermath of the Napoleonic Wars. Economists did not think in terms of shifts in short-run aggregate supply.

Wage increases began shifting the short-run aggregate supply curve to the left, but expansionary policy continued to increase aggregate demand and kept the economy in an inflationary gap for the last six years of the 1960s. The experience of the 1960s and 1970s appeared to be broadly consistent with the monetarist argument that changes in the money supply are the primary determinant of changes in nominal GDP. For example, the yield on 10-year Treasuries peaked at 15.84% in September 1981. This was almost two years after Volcker's Fed announced its disinflationary program in October 1979, suggesting that long-term inflation expectations were still in the double digits. An alternative take was advocated at the dawning of the revolution by Dennis Robertson, who Fletcher has described as the most intellectually formidable of Keynes's contemporary critics. Economists Robert Shiller and George Akerlof re-asserted the importance of recognising uncertainty in their 2009 book Animal Spirits. The analysis of the determination of the price level and real GDP becomes an application of basic economic theory, not a separate body of thought.

[22], While much attention is given to the impact on academic economics, the revolution also had a practical dimension. Monetary policy could also be used to stimulate the economy—for example, by reducing interest rates to encourage investment. Rather than seeing unbalanced government budgets as wrong, Keynes advocated so-called countercyclical fiscal policies that act against the direction of the business cycle. Sarwat Jahan is an Economist and Chris Papageorgiou is a Deputy Division Chief in the IMF’s Strategy, Policy, and Review Department.

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