Section 2:

Macroeconomics
Section 2: Macroeconomics
2.1 The level of overall economic
activity
2.2 AD and AS
2.3 Macroeconomic objectives
2.4 Fiscal policy
2.5 Monetary policy
2.6 Supply-side policies
2.6 Supply-side policies
 The Story of context
Keynes:
a hero or villain?

1940s - 1960s: the Keynesian demand-man

agement policies dominated.
However, by 1970s, rich economies were loc
ked into “stagflation” - a combination of rec
ession with rising inflation.
Keynesian demand-side policies failed. Mac
roeconomic policies met one of their most s
erious challenges …
 Neo-classical
vs
Keynesian

“Can We Blame
Mr. Keynes?”
- “Maybe.”
1970s – 1980s: debate/New classical
New classical/monetarist shook or even r
eoriented the centrality of the Keynesian
paradigm.
Supply-side approaches ruled.
Champions of supply-side economic theory:
US President Ronald Reagan and UK Prime Mi
nister Margaret Thatcher
 Thatcherism
• First female British
Prime Minister
• Longest-serving in
the 20th century (3
successive terms
1979-90)
• "Iron Lady“
Policies of “Iron Lady” to fight stagflation:
• Deregulation of financial sector
abolished exchange controls, removed restrictions on Lon
don Stock Exchange
• Privatized coal, gas, water, electricity, steel, rail…
large-scale strikes & unemployment
• Reduced trade union power
• Reduced spending on public services
cuts in education & housing spending
Time of Reagan: 1980s in the US
• Dramatic economic recovery
• Improved relations with the Soviet Union
Reagan in Hollywood
The first US President that wa
s an actor turned politician
What did it mean by “Reaganomics”?
• Deregulation of business
• Reduced trade union power cru
shed a strike by air traffic controllers
• Reduced public spending
• Tax cuts
esp. for upper-income groups: “trickle-down
Reagan visited the Soviet Union in 1988, at the Red Square, Moscow.
 Unit Goals
Students should be able to define, diagram, give exa
mples of, and evaluate:
2.6.1 The role of supply-side policies
 Supply-side policies and the economy
2.6.2 Interventionist supply-side policies
 Investment in human capital
 Investment in new technology
 Investment in infrastructure
 Industrial policies
2.6.3 Market-based supply-side policies
 Policies to encourage competition
 Labour market reforms
 Incentive-related policies
2.6.4 Evaluation of supply-side policies
 The strengths and weaknesses of supply-side policies
2.6 Supply-side policies

2.6.1 The role of supply-side policies

2.6.2 Interventionist supply-side policies
2.6.3 Market-based supply-side policies
2.6.4 Evaluation of supply-side policies
Syllabus content
2.6.1 The role of supply-side policies
 Supply-side policies and the economy
 Explain that supply-side policies aim at positively affecting the production side of an economy by imp
roving the institutional framework and the capacity to produce (that is, by changing the quantity and
/or quality of factors of production).
 State that supply-side policies may be market-based or interventionist, and that in either case they ai
m to shift the LRAS curve to the right, achieving growth in potential output.
2.6.2 Interventionist supply-side policies
 Investment in human capital
 Explain how investment in education and training will raise the levels of human capital and have a sh
ort-term impact on AD, but more importantly will increase LRAS.
 Investment in new technology
 Explain how policies that encourage research and development will have a short-term impact on aggr
egate demand, but more importantly will result in new technologies and will increase LRAS.
 Investment in infrastructure
 Explain how increased and improved infrastructure will have a short-term impact on aggregate dema
nd, but more importantly will increase LRAS.
 Industrial policies
 Explain that targeting specific industries through policies including tax cuts, tax allowances and subsi
dized lending promotes growth in key areas of the economy and will have a short-term impact on agg
regate demand but, more importantly, will increase LRAS.
2.6.3 Market-based supply-side policies
 Policies to encourage competition
 Explain how factors including deregulation, privatization, trade liberalization and antimonopoly regul
ation are used to encourage competition.
 Labour market reforms
 Explain how factors including reducing the power of labour unions, reducing unemployment benefits
& abolishing minimum wages are used to make labour market more flexible (more responsive to S & D).
 Incentive-related policies
 Explain how factors including personal income tax cuts are used to increase the incentive to work, an
d how cuts in business tax and capital gains tax are used to increase the incentive to invest.
2.6.4 Evaluation of supply-side policies
 The strengths and weaknesses of supply-side policies
 Evaluate the effectiveness of supply-side policies through consideration of factors including time lags,
the ability to create employment, the ability to reduce inflationary pressure, the impact on economic
growth, the impact on government budget, the effect on equity, and the effect on the environment.
 2.6 Supply-side policies
2.6.1 The role of supply-side policies
 Supply-side policies and the economy
2.4-2.6 Macroeconomic policies
1. Demand-side policies: AD (Keynesia
n)
 Fiscal policy
• Expansionary & contractionary
 Monetary policy
• Expansionary & contractionary
2. Supply-side policies: LRAS (New classica
l)
 Interventionist S-side policies
 Market-based S-side policies
Supply-side policies aim at increasing potential output (the overall pr
oductive capacity) of an economy by increasing the quantity and/or i
mproving the quality of the factors of production, thus shifting the lo
ng-run aggregate supply (LRAS) curve to the right.
Interventionist supply-side policies are government-led attempts to in
crease the productive capacity of the country.
Market-based supply-side policies are intended to reduce government
intervention to its minimum thereby allowing free market to increase
efficiency and improve incentives.
 SSPs aim at positively affecting the production side of an
economy by improving the institutional framework and t
he capacity to produce (that is, by increasing the quantity
and/or quality of factors of production).
 SSPs may be market-based or interventionist, and that in
either case they aim to shift the LRAS curve to the right, a
chieving growth in potential output.
 2.6 Supply-side policies
2.6.2 Interventionist supply-side polic
ies
 Investment in human capital
 Investment in new technology
 Investment in infrastructure
 Industrial policies
• Interventionist
mprove the FoP.
SSPs require some kind of gov’t action to i

• Both D-side & S-side implication: require immediate gov’

t spending (G), which will initially stimulate AD, however,
more importantly, they will create an enduring expansio
n of LRAS.
D-side effects (AD) are felt quickly, but it takes a very lon
g time lag to effect on S-side (LRAS).
 2.6 Supply-side policies
 Investment in human capital
Investment in education, training & healthcare will raise
the levels of human capital and have a short-term impa
ct on AD, but more importantly will increase LRAS.
• ST impact on AD: mainly through G↑
• more importantly, it increase LRAS: impro
ves WF productivity (quality of labour & entrepreneur)
make labour more productive & e
ntrepreneurs more innovative. A well-educated, trained & health
y workforce will endure into the future, pushing LRAS outwards.
(↓structural U)
- education: public education, subsidy/tax benefit to privat
e education
- training: public job training centers, apprenticeship progra
ms, or subsidy/tax benefit to private training
- healthcare: public healthcare, prenatal care, inoculations
Human capital: the education, training and experience embodied in t
 2.6 Supply-side policies
 Investment in new technology
Policies that encourage research & development (R&D)
will have a short-term impact on AD, but more importantly
will result in new technologies and will increase LRAS.
• ST impact on AD: G & I ↑
• more importantly, result in new technologies that improve
the quality of physical capital and make all the four FoP mo
re productive, thus increase LRAS (productive capacity)
- gov’t provide, grants for scientific research, finance resear
ch in public research facilities & universities: new life-end
uring drugs, food production (hybrid rice ↑rice yield by 1
5-20%), safer/cleaner technologies
- tax credits: allow firms not to pay taxes on retained profit
s used for R&D
- guarantee intellectual property rights (IPR): patents & cop
yrights.
 2.6 Supply-side policies
 Investment in infrastructure
Infrastructure is the large scale capital (public systems, servi
ces or facilities) of a country that are necessary for economi
c activity; it is usually supplied by the government and adds
to the capital stock of the economy.
These essential facilities and services e.g. roads, highways, r
ailways, bridges, ports, airports, telecommunication networ
ks, sewage treatment, power and water systems.
Increased & improved infrastructure will have a short-ter
m impact on AD, but more importantly will increase LR
AS.
• ST impact on AD: mainly through G↑
• more importantly, it increase LRAS: ↑capital base of the c
ountry in LR (social capital)
eg railway line that connects a landlocked country to a se
aport will increase that country’s exports
 Category Examples
Transport  Roads
 Railways
 Seaports
 Airports

Table 29.3 Cate  Public transport

 Sidewalks (pavements)
gories and exa  Electricity
Public utilities
mples of infrast  Gas
ructure  Water supply
 Sewers
Public services  Police service
 Fire service
CC P. 359  Education service
 Health service
 Waste management

Communication  Postal system

services
 Telecommunications
 Radio and television
 2.6 Supply-side policies
 Industrial policies
Targeting specific industries through policies including t
ax cuts, tax allowances and subsidized lending promotes
growth in key areas of the economy and will have a short-term
impact on AD but, more importantly, will increase LRAS.
• ST impact on AD: I↑
• more importantly, they increase LRAS: ↑capital
- tax cuts, tax allowances, subsidized lending (loans), subsidies
: for industries (“pick winners”): one with comparative ad
vantages, one with good LT prospects…
- protection for “infant industries”: tariffs/quotas/subsidies
to keep foreign competition out until they are sufficiently
large & developed
Famous success in real world:
• Japan: electronics (post-war)
• South Korea: electronics & shipbuilding
 2.6 Supply-side policies
2.6.3 Market-based supply-side policies
 Policies to encourage competition
 Labour market reforms
 Incentive-related policies
• emphasis on importance of FM, aim to open up competiti
on, reduce the role of the government in the economy, an
d return influence to the private sector
• benefits: increased competition (enhanced efficiency, few
er distortions to P mechanism), increased flexibility in LM
, and fewer built-in disincentives
In the real world:
• President Ronald Reagan in the US
• Prime Minister Margaret Thatcher in the UK
 2.6 Supply-side policies
 Policies to encourage competition
− Competition encourages harder work, more inno
vation, lower costs/prices and better quality
− Thus increased competition leads to greater efficiency,
improving productive potential of an economy (i
ncreased competition  greater efficiency)
• Deregulation
• Privatization
• Trade liberalization
• Anti-monopoly regulation
• Deregulation: a type of S-side policy where the gov’t reduc
es the number, type or severity of regulations governing the
behavior of firms (business operation)
− deregulation on health & safety regulations, environmen
tal laws, LM laws, financial market laws…
− decrease CoP & increase AS
• Privatization: sale of public gov’t-owned (nationalized) fir
ms to private sector.
− state-owned enterprises: lack incentives, bloated with u
nnecessary employees & low efficiency
− privately-owned firms: profit-maximizing, more efficient
Privz introduces profit motive & create incentives to lower
costs and improve efficiency; generate revenue for gov’t.
eg. coal industry in UK (Thatcher), telecommunications & a
irlines in many countries. (Eastern Europe & Russia)
• Trade liberalization: encourage free trade, less trade barrie
rs & open competition to improves efficiency of domestic fi
rms. (Protectionism allow domestic firms remain inefficien
t & uncompetitive.)
• Anti-monopoly regulation (anti-trust laws): monopoly po
wer restrict output & increase Ps, thus opening up market
to more firms increase output & decrease Ps.
 2.6 Supply-side policies
 Labour market reforms
− S-siders argue that gov’t efforts to regulate labour
relations result in inefficiencies.
− Thus reforms are used to make LM more flexible, i
.e. more responsive to D & S.

• Reducing the power of labour unions

• Reducing unemployment benefits
• Abolishing minimum wages
• Reducing the power of labour unions
− a secondary cause of cyclical unemployment is ‘sticky d
ownward’ wages, & trade unions’ power is one of the r
easons for such stickiness
− restrict trade union power to bargain collectively & nego
tiate higher wages.
− decrease CoP & increase employment.

• Reducing unemployment benefits

− U benefits create disincentives for workers to find jobs.
− U.B. should be smaller & shorter in duration: those out
of work are more motivated to find jobs; encourage the u
nemployed to take available jobs.

• Abolishing minimum wages

− Gov’t-set min. Ws keeps Ws above its FM level & creat
es a surplus of workers (U).
− Reduction/abolition of min. Ws can decrease cost of la
bour, thus increase employment & AS.
 2.6 Supply-side policies
 Incentive-related policies
− S-siders argue that higher Ts may act as a disincen
tive to work & invest, discouraging work & produ
ction.
− Thus tax cuts increase incentives to work & invest
, encourage productivity & business expansion, in
creasing potential output of the economy.
• Personal income tax cuts are used to incr
ease the incentive to work.
• Cuts in business tax and capital gains tax
are used to increase the incentive to inves
t.
• Personal income tax cuts are used to increas
e the incentive to work.
↓personal income tax incentive to work↑
− T cuts increase workers’ disposable income, encouraging
more work. (labour Q&Q)
− Laffer curve: lower Ts will raise T revenue
(reduction at high end of T rate can stimulate work, greater work
ers’ income will bring in increased T revenue. PB P.406)

• Cuts in business tax and capital gains tax are

used to increase the incentive to invest.
↓business tax & capital gains tax incentive to invest↑
− corporate T cuts leave businesses more profits, encoura
ging more I to produce more. (capital Q&Q)
− A tax on capital gains discourages I on capital, eg. less pr
ofit made when selling property/shares in a company. T
hus tax cut will make entrepreneurial risks more rewardi
ng & encourage I.
 2.6 Supply-side policies
2.6.4 Evaluation of supply-side policies
 The strengths & weaknesses
Consider the factors:
1. Time lags
2. Ability to create employment
3. Ability to reduce inflationary pressure
4. Impact on economic growth
5. Impact on the government budget
6. Effect on equity
7. Effect on the environment
1.Time lags
• A crucial weakness: take long to ↑a country’s potential output
eg I in edu & R&D take years to generate noticeable benefit
2.Ability to create employment
• I in edu, R&D & infra: often entail job creation
• Privatization: massive layoffs from state-owned enterprises
3.Ability to reduce inflationary pressure
• Most SsP: prevent talent shortage or cptl bottlenecks → low CoP (eg Ws)
eg New techs, p.t.e.cmpt, LM reform: lower costs for firms & low
er Ps for consumers
• ↑ in LRAS always → lower PL (diagram)
4.Impact on economic growth (diagram)
• Unless in recession, ↑in potential output →↑ in actual output
eg more productive L & cpt → produce more with same amt of r.
5.Impact on the gov’t budget
• Interventionist SsP: often entail additional G, ↓gov’t revenue
• Incentive-related P: lower gov’t revenue
• Not feasible if public debt is very large compared to GDP
6.Effect on equity
• LM reforms + relaxing empt regulations: a blow to the poorest w
orkers → a more inequitable i.d.
7.Effect on the environment
• Dereg: ↓firms’ private costs but create large social costs: polluti
on & depletion of non-renewable resources
• Damage to sus. d in LR compromises ↑in p. output
Conclusion: an increase in LRAS will have an entirely favorable impact:
an increase in Yf/Y & a fall in PL: SsP are the most effectively way of ac
hieving growth, U & inflation goals at same time (when not in recession)
3.Ability to reduce inflationary pressure
↑ in LRAS always → lower PL

4.Impact on economic growth

Impact of an increase in LRAS depends on initial E position of e:
• when e at/close to Yf: LRAS↑ (LRAS1 to LRAS2)Y↑ (Y1to Y2)
• when below Yf (in recession): ↑LRAS will have no effect on out
put (AD is not sufficient to buy up increased p. output) (thus D-
side policies are needed to ↑AD - Keynesian view)
Summary: Supply-side policies
 Interventionist supply-side policies
1. Investment in human capital
2. Investment in new technology
3. Investment in infrastructure
4. Industrial policies
 Market-based supply-side policies
1. Policies to encourage competition
1) Deregulation
2) Privatization
3) Trade liberalization
4) Anti-monopoly regulation
2. Labour market reforms
1) Reducing the power of labour unions
2) Reducing unemployment benefits
3) Abolishing minimum wages
3. Incentive-related policies
1) Personal income tax cuts are used to increase the i
ncentive to work.
2) Cuts in business tax & capital gains tax are used to i
ncrease the incentive to invest.
S-side policies & D-side policies (Fiscal policy)
 Interventionist supply-side policies
1. Investment in human capital (G, T)
2. Investment in new technology (G, T)
3. Investment in infrastructure (G)
4. Industrial policies (G, T)
 Market-based supply-side policies
1. Policies to encourage competition
1) Deregulation
2) Privatization
3) Trade liberalization
4) Anti-monopoly regulation
2. Labour market reforms
1) Reducing the power of labour unions
2) Reducing unemployment benefits
3) Abolishing minimum wages
3. Incentive-related policies
1) Personal income tax cuts are used to increase the i
ncentive to work. (T)
2) Cuts in business tax & capital gains tax are used to i
ncrease the incentive to invest. (T)
 Summary: Evaluate S-side policies
Strengths Weaknesses
1. Time lags A crucial weakness:
very long time
eg I in edu & R&D
2. Ability to Interventionist SsP:
create eg I in edu, R&D & infra: Privatization: ↑U
employment job creation
3. Ability to Most SsPs:↓CoP (Ws)
reduce eg I in new techs, p.to e.
inflationary competition, LM reform...
pressure (↑LRAS always ↓PL)
4. Impact on e. Unless in recession,
growth ↑p.output →↑a.output Ineffective in recession
5. Impact on Interventionist SsP: ↑G, ↓g.R
gov’t budget Incentive-related P: ↓g.R
6. Effect on LM reforms, relaxing empt
equity regulations: ↑inequality
7. Effect on Deregulation: pollution &
environment depletion
An increase in LRAS will have an entirely favorable
Conclusion impact: ↑Yf/Y (↓U) & ↓PL. Thus, SsP = most
effective way of achieving growth, U & inflation
goals at the same time (when not in recession)
Interventionist S-side policies Market-base S-side policies
1. I in human
capital:
Strengths: 1.Policies to
encourage
Strengths:
• Education 1. Job creation competition 1. Reduce inflationary pressure:
• Training 2. Reduce inflationary 1) Deregulation ↓CoP (Ws)
• Healthcare pressure: ↓CoP 2) Privatization 2. E. growth: unless in recession,
3) Trade ↑p.output →↑a.output
2. I in new 3. E.growth: unless in liberalization
technology: recession, ↑p.output 4) Anti-monopoly Weaknesses:
• R&D →↑a.output regulation
3. Deregulation: social costs:
3. I in Weaknesses: 2.LM reforms unsafe products, dangerous
infrastructur 1) Reducing work places, polluted
e 4. Time lags: very LR power of L environment
5. Considerable costs unions 4. Privatization: increased U,
4. Industrial 6. Increased G: limited by
2) Reducing U
benefits
unaffordable essential g.
policies: budget constraints as G 3) Abolishing
(water)
• tax cuts, tax involves an OC, budget minimum Ws 5. LM reform/deregulation:
allowances, deficit & fiscal problems greater inequality: more
subsidized vulnerable, more exploitation,
lending 3.Incentive-
New tech: need guarantee related policies lower income/lv. std
IPRs (patents & copyrights) 1) P.i. tax cuts to 6. T cut:
increase • ↓gov’t revenue: less public
Infrastructure: major incentive to spending & budget problems
projects, showcase, work • Workers take more leisure;
corruption & waste 2) Cuts in b.tax & firms pass on increased
c.g. tax to profits to shareholders not I
Industrial policies: increase
• ↓gov’t revenue incentive to (↓production & maintain
invest profits: “profit-satisficing”)
• Success can create • Redistributive effect: if ↓T
entrenched corporate rates for upper-income
interests who regard groups, more of T burden falls
national support as a on lower-income ppl
corporate right • Depends on specifics of a
country: effective in c with
high T rates but not in c with
low rates
 Demand-side policies Supply-side policies
(Impact on LRAS) (ST impact on AD)
 Fiscal policy: G & taxes  Interventionist S-side policies
1. Expansionary 1. Investment in human capital (G,
fiscal policy: ↑AD T)
↑G, ↓T 2. Investment in new technology (G,
T)
2. Contractionary 3. Investment in infrastructure (G)
fiscal policy: ↓AD 4. Industrial policies (G, T)
↓G, ↑T
 Market-based S-side policies
 Monetary policy: SM & 1. Policies to encourage competition
1) Deregulation
IRs 2) Privatization
1. Expansionary (loose, easy) 3) Trade liberalization
monetary policy: ↑AD 4) Anti-monopoly regulation
↑SM, ↓IRs 2. Labour market reforms
1) Reducing the power of L unions
2. Contractionary (tight) 2) Reducing unemployment benefits
monetary policy: ↓AD 3) Abolishing minimum wages
↓SM, ↑IRs 3. Incentive-related policies
1) Personal income tax cuts are used
to increase the incentive to work.
(T)
2) Cuts in business tax & capital
gains tax are used to increase the
incentive to invest. (T)
 Demand-side policies Supply-side policies
Strengths of fiscal Strengths of Strengths of Strengths of
policy monetary policy interventionist SsP market-based SsP
1.Target sectors of 1.CB independence: 1.Job creation 1.Reduce inflationary
economy no political pressure 2.↓inflationary pressure (↓CoP)
2.Direct impact on 2.Control: adjust IRs pressure (↓CoP) 2.Growth (not in
AD: con fp: D-pull incrementally 3.Growth (notin recession):
inflation 3.Speed: implement recession): ↑p.output→↑a.output
3.Effective in IRs changes quickly ↑p.output→↑a.outpu
recession: exp fp 4.No crowding out t
(↑G): growth
lose to
4.Multiplier effects
(HL) • Ineffective in recession. (work at/c
Yf)
• Best solution: able to achieve growth,
time.
U & inflation goals at same
Weaknesses of Weaknesses of Weaknesses of Weaknesses of
fiscal policy monetary interventionist SsP market-based
1.Time lags: very LR policy 1.Time lags: very LR SsP
(legislative 1.Time lags: LR 2.Considerable costs 1.Deregulation: social
procedure) 2.ineffective in costs (environment)
2.Political constraints deep recession 3.↑G: OC & budget 2.Privatization: ↑U,
(confidence) problems unaffordable essential
3.Crowding out (G) g.
4.inability to deal 3.Inability to deal New tech: IPRs
with S-side causes: with S-side causes: 3.LM reform/dereg:
cost-push cost-push inflation, Infrastructure: greater inequality
inflation, natural U natural U showcase projects, 4.T cut:
5.Conflict among 4.Conflict among corruption & waste • ↓gov’t revenue
gov’t e. objectives gov’t e. objectives Industrial policies: • worker: more leisure;
• ↓gov’t revenue firm: profits to
• Corporate interests shareholders &
• Exp FP (↑G) is very effective in “profit-satisficing”
• Redistributive
recession. effect: T cut for
• Unble to achieve sagrowth, U & upper-income
inflation goals at me time. groups
• Specifics: effective
• Exp: not work if etsat/close to Yf in high-T-rate country
(S-side constrain )
Questions
1. Fill in the blanks using terms in word bank.

Market-based -side policies are i

ntended to reduce intervention
thereby allowing the free to inc
rease and improve .

efficiency, supply, market,

incentives, government
2. Choose the THREE correct answers:
Effective supply-side policies are expected to:
A. Move SRAS to the right, increasing the full e
mployment level of output
B. Move LRAS to the right, increasing the full e
mployment level of output
C. Expand the PPC, increasing productive capa
city
D. Improve the quantity and quality of the fact
ors of production
3. Choose the ONE correct answers:
Which of the following is NOT a likely negative
consequence of market-based SSPs:
A. Increased vulnerability among the unemplo
yed.
B. Budget deficits from reduced tax revenues.
C. Lower prices for privatized government serv
ices.
D. Risks to worker safety from deregulation.
Determine whether the following statements
are true or false. Explain your answers.
1.Privatization aims at increasing efficiency.
True. Privately owned firms have a greater incentive
to cut costs as their goal is to maximize profits.
2. The effect of deregulation & privatization o
n unemployment is ambiguous.
False. Deregulation can make employment easier, wh
ile privatization often causes more unemployment.
3. SSPs may worsen income distribution.
True. LM reform negatively affect labour income, whi
le tax cuts increase the income of the well-off.
(This explains why market-based SSPs have met with oppositi
on in many countries.)
 A Big Picture Of Economics
Classical • An economy will rest at FE.
economics: • Laissez-faire
Free market

Keynesian • An economy may not rest at FE.

school: • Active GI (to achieve FE &
stabilize economy)
An active • D-side policies
government role (fiscal&monetary)

Neo-classical school: • An economy will always

Free market move towards FE.
and • Min. GI
minimum • S-side policies
intervention
 A timeline of economics: who rules?
 Pre-1929 (150 years): The classical school
Free market. Adam Smith
 1930s/After WWII - 1970s: The Keynesian school
An active government role. John M. Keynes
(First regular use of expansionary fiscal policy: Roosevelt in US i
n Great Depression of 1930s.)
 1970s – 1990s: debate/New classical school
Free market & minimum intervention. Followers of classical
• 1970s: Monetarism: Milton Friedman. Deconstructed Keynesia
n interventionist approach. Markets “rule”.
(Economic crisis: stagflation, 1973 1st oil crisis/great inflation)
• 1980s: Supply-sider: market forces are further emphasized.
(Thatcher in 1979 in UK & Reagan in 1980 in US)
 Late 1990s - Debate continues...
• 1997-8 East Asian crisis & 2007-9 Great Recession: a revival of
Keynesian policies: doubts on extreme pro-market policies an
d “Washington Consensus”.
• Rising inequalities within/between countries: necessity to ma
nage globalization.
The end of sectio
n 2: Macroeconom
ics