The Keynesian Model

We did not discuss in lecture developments in modern macroeconomics after Keynes. This is covered succinctly by John Cassidy in the attached chapter.  In the 1970s Keynes fell out of favor because it was hard for the Keynesian model to explain inflation and unemployment at the same time.  Milton Friedman introduced the monetarist explanation which posited that the Fed made mistakes that caused recessions.  Lucas introduced rational expectations which posited that Fed mistakes shouldn’t matter because people will anticipate these mistakes.  So what’s left?  The new classicals, or the real business cycle theory, says that unemployment is voluntary.  The economy is always in equilibrium or moving toward it, periods of unemployment occur because people voluntarily choose leisure time.  What do you think about this theory?  People shouldn’t complain about unemployment if its voluntary?  Do they?  What about in the pandemic does that change things?For more information on the Keynesian model check on this:

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