Thinking like a Macro-Economist

Thinking like a Macro-Economist: John Maynard Keynes and Milton Friedman

Macro-economics is perhaps the most divisive area of economics. Macro-economists divide themselves into different schools of thought. Two of the biggest camps are the Keynesians and the Monetarists. Keynesians and post-Keynesians follow the theories of John Maynard Keynes, the most-celebrated economist of the 20th century who proposed an active role for government to stabilize the economy. Monetarists, on the other hand, follow Milton Friedman, the Nobel Prize winning economist who opposed government actions and emphasized the role of money in the economy, thus the name "monetarism".

For this assignment do some research on the ideas of Keynes and Friedman. Focus on the "big picture" of what their main ideas are and how they have influenced policy makers. Then write a 3 to 4-page paper addressing the following questions:

1. Compare and contrast the way Keynes and Friedman approach the economy. What are the key differences and similarities?

2. The following are five scenarios dealing with macro-economic policy. For each scenario determine if it represents fiscal policy or monetary policy, and explain your answer.

a. As President, George W. Bush and congress passed a tax decrease across all tax brackets.

b. When President Clinton was in office during the 1990's there was an intentional policy of reducing interest rates, both short and long-term, economy wide.

c. Beginni ng with the Bush administration and continuing with the Obama administration there was a bailout of the financial system.

d. The health care reforms that have been proposed.

e. The Federal Reserve system buys Treasury securities from banks in order to reduce bank holdings of securities and increase their cash balances. One reason to so this is to encourage banks to loan to businesses.

3. Based on your research and understanding of the background materials in this module, explain with which of the two economists do you agree more and explain why.