The Great Economists Keynes1

The Neoclassical Synthesis

a term, that Paul Samuelson apparently coined - which underpins modern economics

it's better for reputations to fail … than to succeed …

Conventionally…Unconventionally

Birth and death are also part of the … adjustment

long-term

Government could play role in …

short-run

Budget deficit

it arises if the government spends more than it receives in a given year

Government debt

is the total accumulated deficit over time

Keynes argued that … was a tool for correcting an economy that was operating below its full potential, but which his critics thought it would lead up to even bigger …

public investment…budget deficits

Unemployment may play role of … as it increases government spending during downturns without the government having to choose to act.

automatic stabilizer

Stagflation

the combination of high unemployment and high inflation

The new neoclassical synthesis

theories of how consumers make decisions across periods

Rational expectations theory posits that consumers know that a … today means a … in the future, so they don’t change their behavior, thus a … would not raise consumption and boost growth. Intriguingly, only a surprise government policy would work.

tax cut … tax rise … tax cut

Britain’s budget deficit was around … of GDP at the end of 2014/2015 Parliament. When Britain was rescued by the … in 1976, its budget deficit was nearly … of GDP. That’s because of the financial crisis that had increased the level of government debt in the World’s major economies. Following the 2008 crash, Britain’s debt increased to nearly …

5% … IMF … 6.9% … 90%

In Britain, the pace of … had slowed down alongside the economy, but was such a policy necessary? Part of the rationale for cutting … was that investors would not want to lend to the UK if it did not cope with reducing its budget deficit. Austerity and … assistance were the indicators.

Austerity … Government spending … IMF

European governments believed that … was needed to restore investor confidence, so pushed ahead with austerity.

EU stressed the need for member countries e.g. … to adopt … if they are to share the same currency and a common monetary policy. The effect - reliance of investors.

Fiscal discipline … Greece … Fiscal discipline … Monetary policy

For the first time, during the … in …, the ECB undertook … and made … into the economy by buying government debt

Euro crisis … 2015 … QE … Large cash injections

QE (Quantitative Easing)

Monetary policy, where Central Bank purchases securities in the open market to reduce interest rates and increase money supply.

What does QE involve?

It involves us buying bonds to push up their prices and bring down long-term interest rates. In turn, it increases how much money people spend overall which puts upward pressure on the prices of goods and services

Gilts

Yields on ten-year government debt

Crowding out effect - how the government’s … would make it harder for … to do so because their demand for loans would … and make it more expensive for others to borrow. It doesn’t work when the country works ….

Borrowing to invest … Private firms … Push up the interest rate … Below its potential

The Crowding in effect

Government investment can make private investment more efficient