• Advanced Macroeconomics

THE SCHOOLS OF
THOUGHTS IN
MACROECONOMICS

Presentation Slides

Dr. NGUYEN ANH PHUONG

PhD, MSc, BA, FHEA
 Chapter Outline
• The Rise of Classical Economics and the
Revolution of J.M. Keynes
• The Monetary Economics
• Neoclassical macroeconomics
• Supply-side economics
• Six debates on macroeconomic policies

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Learning Outcomes
• Explain and apply economic thoguhts for
analysing economic phenomena and
business cycles

• Understand and compare the

development of macroeconomic schools
as a basis for building and applying
macro policies.

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Six Debates on Macroeconomic Policies

Debate 1: Should monetary and fiscal policymakers

try to stabilize the economy?
• Changes in aggregate demand and aggregate
supply
– Short-run fluctuations in production and
employment LRAS

• Monetary and fiscal policy

– Can shift aggregate demand
– Influence these fluctuations
debate 1:

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 1 (con.t)
Pro: policymakers should try to stabilize the
economy
• When aggregate demand is excessive
– High inflation
– Policymakers
• Cut government spending
• Raise taxes
• Reduce the money supply
– More stable economy, benefits everyone
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 1 (cont.)
Con: policymakers should not try to stabilize
the economy
• Monetary and fiscal policy
– Do not affect the economy immediately
– Work with a long lag
• Monetary policy – about 6 months
• Fiscal policy – long political process, it can
take years
– Economic forecasting is highly imprecise

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 1 (cont.)
Con: policymakers should not try to stabilize
the economy
• Policymakers trying to stabilize the
economy
– Can do just the opposite
– Economic conditions can easily change

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 2
2. Should the government fight recessions
with spending hikes rather than tax cuts?
Pro: the government should fight recessions
with spending hikes
• Fundamental problem during recessions
– Inadequate aggregate demand
• Key to ending recessions
– Restore aggregate demand to a level
consistent with full employment
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 2 (cont.)
Pro: the government should fight recessions
with spending hikes
thuế giảm: consumption tăng đó là theo lý thuyết nhưng
• Fiscal policy trong thực tế khi thuế giảm nhà nước không thể bắt
người dân dùng mà người ta còn đem đi tiết kiệm vì có
– Cutting taxes một số tiền. người ta expert rằng thuế sẽ tăng lại nên giờ
người ta trữ bay giờ
• Increased household disposable income
• Increase spending on consumption
– Increased government spending
• Adds directly to aggregate demand
– Particularly useful when the tools of
monetary policy lose their effectiveness
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 2 (cont.)
Pro: the government should fight recessions
with spending hikes
• 2009, Obama administration estimations
– $1of tax cuts increases GDP by $0.99
– $1of government purchases increases
GDP by $1.59
– The $800 billion stimulus package
• Create or save more than 3 million jobs by the
end of the president’s second year in office

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 2 (cont.)
Con: the government should fight recessions
with tax cuts
• Tax cuts
– Increase AD
• Increase households’ disposable income
• By altering incentives - stimulate investment
– Increase AS
• Unemployed - incentive to search for jobs
• Employed - incentive to work longer hours

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 2 (cont.)
Con: the government should fight recessions
with tax cuts
• Problems with increasing government
spending during recessions
– Government-spending multipliers – smaller
• Consumers - higher taxes in the future
– Cut back spending today
• Firms - reduced expectations of future profits
– Reduce investment spending today

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 2 (cont.)
Con: the government should fight recessions
with tax cuts
• Problems with increasing government
spending during recessions
– Fast increase in spending
• Buy things of little public value
– “Bridges to nowhere”
– Careful and deliberate planning
• Long lags

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 3
3. Should monetary policy be made by rule
rather than by discretion?
• Federal Open Market Committee
– Sets monetary policy – complete discretion
– Meets about every six weeks
• Evaluate the state of the economy
– Short-term interest rates
• Raise, lower, or leave unchanged
– The Fed - adjusts the money supply
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 3 (cont.)
Pro: monetary policy should be made by rule
• Problems with discretionary monetary
policy
– Does not limit incompetence and abuse of
power
– Political business cycle
• If central bankers ally with politicians
• Discretionary policy - can lead to economic
fluctuations that reflect the electoral calendar

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 3 (cont.)
Pro: monetary policy should be made by rule
• Problems with discretionary monetary
policy
– Might lead to more inflation than desirable
– Time inconsistency of policy
• Central bankers – know there is no long-run
trade-off between inflation and unemployment
– Announce goal - zero inflation
– Short-run trade-off between inflation and
unemployment
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 3 (cont.)
Con: monetary policy should not be made by
rule
• Discretionary monetary policy – flexible
– The Fed – various circumstances
– Better to appoint good people to conduct
monetary policy
• And then give them the freedom to do the best
they can
– The alleged problems with discretion are
largely hypothetical
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 4
4. Should the central bank aim for zero
inflation?
• Inflation
– Prices rise when the government prints too
much money
– Society faces a short-run trade-off between
inflation and unemployment

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 4 (cont.)
Pro: the central bank should aim for zero
inflation
• Reducing inflation
– Temporary: high unemployment & low
output
– Long-run: no trade-off
– Temporary costs
– Permanent benefits

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 4 (cont.)
Con: the central bank should not aim for zero
inflation
• Benefits of zero inflation – are small
– Compared to moderate inflation
• Costs of reaching zero inflation are large
– Sacrifice ratio
– Social costs
• Small inflation - may be a good thing

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 5
5. Should the government balance its
budget?
• When the government spends more than
it collects in tax revenue
– It covers this budget deficit by issuing
government debt
• Affect saving, investment, and interest rates

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 5 (cont.)
Pro: government should balance its budget
• Government debt
– Direct effect: place a burden on future
generations
– Macroeconomic effects
• Lower national saving
• Future generations: lower incomes and higher
taxes

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 5 (cont.)
Pro: government should balance its budget
• Aim for a balanced budget
– Greater national saving
– Greater investment
– Economic growth

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 5 (cont.)
Con: government should not balance its
budget
• Budget deficit
– Just one piece of a large picture
• Of how the government chooses to raise and
spend money
• Fiscal policy
– Affect different generations of taxpayers

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 6
6. Should the tax laws be reformed to
encourage saving?
• Nation’s standard of living
– Depends on its ability to produce goods
and services
• Determined by how much it saves and invests
for the future

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 6 (cont.)
Pro: the tax laws should be reformed to
encourage saving
• Nation’s saving rate
– Determinant of long-run economic prosperity
• Other policies and institutions
– Discourage saving
• Tax code – improved to encourage saving
– Preferential treatment to some types of
retirement saving
– Consumption tax
Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA
 Debate 6 (cont.)
Con: the tax laws should not be reformed to
encourage saving
• Fairly distribution of the tax burden
• Tax policies – to encourage saving
– Increase the tax burden on people who
cannot afford to save
– May not be effective
• Substitution effect
• Income effect

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

 Debate 6 (cont.)
Con: the tax laws should not be reformed to
encourage saving
• Other ways to increase national saving
– No tax breaks to the rich
– National saving = private + public saving
– Raise public saving
• By reducing the budget deficit
• Raise taxes on the wealthy

Dr. Nguyen Anh Phuong, PhD, MSc, BA, FHEA

References
• Mankiw, G. (2009) Macroeconomics.
Worth Publishers.

• Samuelson, A. P. and Nordhaus, D. W.

(2018) Economics, 19th ed, Mcgraw Hill.