Principles Of EconomicsPrinciples Of Economics

Power Point PresentationPower Point Presentation Chapter 13Chapter 13

Keynes and Keynesian Keynes and Keynesian Macroeconomic PolicyMacroeconomic Policy

► April 5, 2007April 5, 2007

©© J. Patrick Gunning J. Patrick Gunning

What Is Macroeconomic What Is Macroeconomic PolicyPolicy

► Macroeconomic problems:Macroeconomic problems: 1. How to promote economic growth.1. How to promote economic growth. 2. How to maintain an acceptable level of 2. How to maintain an acceptable level of

unemployment.unemployment. 3. How to maintain an acceptable level of 3. How to maintain an acceptable level of

inflation.inflation.►Macroeconomic policy refers to Macroeconomic policy refers to

government policy that attempts to government policy that attempts to “solve these problems.”“solve these problems.”

Birth Of The Idea Of Macro Birth Of The Idea Of Macro PolicyPolicy

►The unemployment of the great The unemployment of the great depression.depression.

►Followed by WWII.Followed by WWII.► In 1946, would the depression and its In 1946, would the depression and its

unemployment return?unemployment return?►The Employment Act of 1946 was The Employment Act of 1946 was

passed.passed.

A Shift Of FaithA Shift Of Faith

►The act gave the executive branch of The act gave the executive branch of the U.S. government the power and the U.S. government the power and responsibility to try to carry out responsibility to try to carry out macroeconomic policy.macroeconomic policy.

►The Employment Act signified that, for The Employment Act signified that, for many citizens, a faith in unrestricted many citizens, a faith in unrestricted free enterprisefree enterprise had been replaced by a had been replaced by a faith in faith in government guidancegovernment guidance of free of free enterprise.enterprise.

Types Of Macroeconomic Types Of Macroeconomic Policies Since 1946Policies Since 1946

►1. Keynesian economics (1946-1970s).1. Keynesian economics (1946-1970s).►2. Monetarism (began to influence 2. Monetarism (began to influence

policies beginning in the 1970s).policies beginning in the 1970s).►3. Supply-side economics (mid-1970s 3. Supply-side economics (mid-1970s

to 1990s).to 1990s).

Two Parts of This ChapterTwo Parts of This Chapter

►1. The Economics of Keynes.1. The Economics of Keynes.

►2. Keynesian economics: the 2. Keynesian economics: the macroeconomic policy proposed by macroeconomic policy proposed by economists who roughly followed the economists who roughly followed the economics of Keynes.economics of Keynes.

New Topic:New Topic: The Economics Of The Economics Of KeynesKeynes

►Keynes: famous economist at Keynes: famous economist at Cambridge University in England.Cambridge University in England.

►WroteWrote The General Theory Of The General Theory Of Employment, Interest And MoneyEmployment, Interest And Money (1936).(1936).

►Difficult-to-read book about Difficult-to-read book about unemployment and output in a unemployment and output in a recession.recession.

First PointFirst Point: Keynes’s Hypotheses : Keynes’s Hypotheses About Real Output And Business About Real Output And Business

CyclesCycles► Keynes made two important points:Keynes made two important points:► 1. Real output may not reach its potential 1. Real output may not reach its potential

because there may be less than the optimal because there may be less than the optimal amount of entrepreneurship.amount of entrepreneurship.

► 2. Business cycles are likely to be more 2. Business cycles are likely to be more severe than neoclassical economists severe than neoclassical economists believed because:believed because: A. Entrepreneurs' investment is unstable.A. Entrepreneurs' investment is unstable. B. Wages are rigid.B. Wages are rigid. C. Lenders may speculate on the rate of interest.C. Lenders may speculate on the rate of interest.

Real Output Less Than Its Real Output Less Than Its PotentialPotential

► Real output gap:Real output gap: a gap between the actual a gap between the actual real output and potential real output.real output and potential real output.

► Keynes believed that there would be a real Keynes believed that there would be a real output gap due to risk averseness.output gap due to risk averseness.

► Risk averse:Risk averse: the characteristic of a person the characteristic of a person who is less willing to choose a prospect for who is less willing to choose a prospect for gain with an uncertain payoff than to choose gain with an uncertain payoff than to choose on one with a certain payoff. Risk on one with a certain payoff. Risk averseness is measured by comparing the averseness is measured by comparing the expected payoff of each prospectexpected payoff of each prospect.

Risk AversenessRisk Averseness

► Consider two prospects for gain:Consider two prospects for gain: A: a 100 % probability of receiving $100.A: a 100 % probability of receiving $100. B: a 50 % probability of receiving $200.B: a 50 % probability of receiving $200. B is B is more riskymore risky because the probability of receiving it is because the probability of receiving it is

lower.lower.► Which would you prefer?Which would you prefer?

If you prefer A, you are risk averse.If you prefer A, you are risk averse. If you prefer B, you are a risk preferrer.If you prefer B, you are a risk preferrer. If you are indifferent, you are risk neutral.If you are indifferent, you are risk neutral.

► Risk premiumRisk premium: the amount of money that a person : the amount of money that a person demands in order to compensate him for accepting demands in order to compensate him for accepting an alternative that is more risky than other. an alternative that is more risky than other. An example.An example.

Second Point:Second Point: The Business Cycle Is The Business Cycle Is Likely To Be More Severe Than We Likely To Be More Severe Than We

ThinkThink►Three reasons:Three reasons:

►1. Entrepreneurs’ errors.1. Entrepreneurs’ errors.►2. Rigid Wages.2. Rigid Wages.►3. Speculation by Lenders (the liquidity 3. Speculation by Lenders (the liquidity

trap). trap).

1. Entrepreneur Errors1. Entrepreneur Errors

► Entrepreneurial investment may exaggerate Entrepreneurial investment may exaggerate the amplitude of the business cycle because the amplitude of the business cycle because entrepreneurs may exhibit “follow the entrepreneurs may exhibit “follow the leader” over-optimism or over pessimism.leader” over-optimism or over pessimism.

► Entrepreneurs are subject to mass Entrepreneurs are subject to mass psychology.psychology.

► They may jump on the bandwagon and They may jump on the bandwagon and follow the crowd instead of making decisions follow the crowd instead of making decisions based on a sound assessment of revenues based on a sound assessment of revenues and costs.and costs.

2. Rigid Wages2. Rigid Wages

► Keynes: the presence of rigid wages cause Keynes: the presence of rigid wages cause unemployment to be higher during a unemployment to be higher during a business cycle than one might think on the business cycle than one might think on the basis of demand and supply analysis.basis of demand and supply analysis.

►Workers may be happy to accept increases Workers may be happy to accept increases in pay during an expansion but unwilling to in pay during an expansion but unwilling to accept decreases during a contraction.accept decreases during a contraction.

► Union leaders may resist an employer’s Union leaders may resist an employer’s proposal to decrease wages.proposal to decrease wages.

► The employer may have no option but to lay The employer may have no option but to lay off workers, causing unemployment.off workers, causing unemployment.

3. Speculation By Lenders3. Speculation By Lenders

►The hypothesis:The hypothesis: speculation by lenders speculation by lenders may stop complete coordination in may stop complete coordination in markets for loanable funds.markets for loanable funds.

How Coordination OccursHow Coordination Occurs

►Review of a normal adjustment to a Review of a normal adjustment to a decrease in demand for loanable decrease in demand for loanable funds.funds.

►Suppliers reduce the interest rate and Suppliers reduce the interest rate and the quantity of loanable funds.the quantity of loanable funds.

►See figure 13-1.See figure 13-1.

Figure 13-1Figure 13-1

Lender Psychology May Block Lender Psychology May Block Coordination In The Loan MarketCoordination In The Loan Market► If you were a lender and expected the If you were a lender and expected the

loanable funds rate to rise on one-year loanable funds rate to rise on one-year loans, you may not want to lend.loans, you may not want to lend.

► If every lender was like you, no lending If every lender was like you, no lending would occur.would occur.

►Consider figure 13-2.Consider figure 13-2.

Figure 13-2Figure 13-2

Rate Cannot Fall Below 2%Rate Cannot Fall Below 2%

►Suppose that once the rate fell to 2%, Suppose that once the rate fell to 2%, everyone expects it to rise in the near everyone expects it to rise in the near future.future.

►Then it could not fall to 1% even Then it could not fall to 1% even though the supply of loanable funds though the supply of loanable funds curve shows that some lenders would curve shows that some lenders would be willing to lend at 1%. Because be willing to lend at 1%. Because lenders speculate on the rate of lenders speculate on the rate of interest, at 2% the supply of loanable interest, at 2% the supply of loanable funds would go to zero. funds would go to zero.

Keynes’s Idea In Terms Of Keynes’s Idea In Terms Of LiquidityLiquidity

►Liquidity:Liquidity: the character of an asset the character of an asset based on the extent to which it can be based on the extent to which it can be easily exchanged for goods. Money is easily exchanged for goods. Money is the most liquid asset.the most liquid asset.

►When the interest rate falls to 2%, When the interest rate falls to 2%, lenders want more liquid assets than lenders want more liquid assets than the one-year loans.the one-year loans.

Liquidity TrapLiquidity Trap

►Liquidity trap:Liquidity trap: the hypothesis that the hypothesis that below some rate of interest, lenders below some rate of interest, lenders would make no loans because they would make no loans because they expect that the rate would rise.expect that the rate would rise.

►The loanable funds market in figure The loanable funds market in figure 13-2 is in a trap because below a 13-2 is in a trap because below a certain rate of interest, lending would certain rate of interest, lending would cease.cease.

Keynes Assumption About The Keynes Assumption About The Loanable Funds MarketLoanable Funds Market

►Keynes did not assume, as we have Keynes did not assume, as we have done, that there are many loanable done, that there are many loanable funds markets, each with a different funds markets, each with a different length and starting time.length and starting time.

►The liquidity trap hypothesis did not The liquidity trap hypothesis did not consider the short-term loan market.consider the short-term loan market.

Keynes’s Corrective PolicyKeynes’s Corrective Policy

►To assure that business firms remain To assure that business firms remain profitable during a recession.profitable during a recession.

►This can be done by stabilizing This can be done by stabilizing aggregate spending.aggregate spending.

New Topic:New Topic: Keynesian Keynesian EconomicsEconomics

► The Employment Act of 1946 led the president The Employment Act of 1946 led the president to form a Council of Economic Advisors.to form a Council of Economic Advisors.

► Keynes died in 1946.Keynes died in 1946.► Members of the Council, interpreters of Members of the Council, interpreters of

Keynes, and their colleagues developed a set Keynes, and their colleagues developed a set of principles for carrying out macroeconomic of principles for carrying out macroeconomic policies.policies.

► Around 1950, these principles were included Around 1950, these principles were included in the first textbooks that distinguished in the first textbooks that distinguished macroeconomics as a separate field of study.macroeconomics as a separate field of study.

Macroeconomics And Macroeconomics And Microeconomics As Defined In The Microeconomics As Defined In The

TextbooksTextbooks►Macroeconomics:Macroeconomics: the study of “the the study of “the

economy as a whole” and the policies economy as a whole” and the policies that could be used to guide it.that could be used to guide it.

►Microeconomics:Microeconomics: the study of markets the study of markets and prices. and prices.

Macroeconomic EquilibriumMacroeconomic Equilibrium

►Keynesian macroeconomic modelKeynesian macroeconomic model: a : a model of aggregate demand and model of aggregate demand and aggregate supply of Keynesian real aggregate supply of Keynesian real output produced during a period of output produced during a period of time.time.

►Macroeconomic equilibriumMacroeconomic equilibrium: the price : the price level and level of Keynesian real level and level of Keynesian real output at which aggregate demand output at which aggregate demand equals aggregate supply.equals aggregate supply.

Aggregate DemandAggregate Demand

►Aggregate spending:Aggregate spending: spending on spending on Keynesian real output.Keynesian real output. Keynesian real output: Keynesian real output: final products final products

produced during a period of time, including produced during a period of time, including services. It does not refer to unfinished services. It does not refer to unfinished products or to used goods.products or to used goods.

►Aggregate demand (curve):Aggregate demand (curve): the amount the amount of spending on Keynesian real output that of spending on Keynesian real output that we assume would occur at different price we assume would occur at different price levels.levels.

Components Of KeynesianComponents Of Keynesian Spending Spending

► The class divisions of and the names The class divisions of and the names assigned to the classes are based roughly assigned to the classes are based roughly on who spends on the final products. on who spends on the final products. 1. 1. Consumption spendingConsumption spending (C): spending by (C): spending by

households on finished goods and on services. households on finished goods and on services. 2. 2. Investment spendingInvestment spending (I): spending by business (I): spending by business

on newly-produced capital goods, increases in on newly-produced capital goods, increases in business inventories of finished products, and business inventories of finished products, and spending by households on new houses spending by households on new houses (Households spend on this. It is an exception.)(Households spend on this. It is an exception.)

3. 3. Government spendingGovernment spending (G): spending by (G): spending by governments.governments.

Graph of Aggregate Demand Graph of Aggregate Demand CurveCurve

Why Aggregate Spending Might Why Aggregate Spending Might Be Higher At Lower Price LevelsBe Higher At Lower Price Levels►1. Consumer spending might be higher 1. Consumer spending might be higher

because households are likely to feel because households are likely to feel that they can afford to buy more that they can afford to buy more goods at lower prices.goods at lower prices.

►2. Businesses investment spending is 2. Businesses investment spending is likely to be higher because when the likely to be higher because when the price level is low, interest rates are price level is low, interest rates are also low. also low.

Aggregate Demand Curve vs. Aggregate Demand Curve vs. Ordinary Demand CurveOrdinary Demand Curve

► The ordinary demand curve for a consumer The ordinary demand curve for a consumer good refers to the marginal consumer’s good refers to the marginal consumer’s evaluation of an additional unit.evaluation of an additional unit.

► The ordinary The ordinary derivedderived demand curve for a demand curve for a resource refers to the marginal resource refers to the marginal entrepreneur’s belief about the additional entrepreneur’s belief about the additional revenue he can earn from employing one revenue he can earn from employing one more unit.more unit.

► The aggregate demand is unrelated to these. The aggregate demand is unrelated to these. It is the total real output on which spending is It is the total real output on which spending is assumed to occur at different levels of prices. assumed to occur at different levels of prices. More spending is assumed to occur at lower More spending is assumed to occur at lower price levels.price levels.

Aggregate SupplyAggregate Supply

► Aggregate supplyAggregate supply: the amounts of different : the amounts of different finished goods and services produced during finished goods and services produced during a period of time. The goods and services are a period of time. The goods and services are produced by business firms and by produced by business firms and by government agencies.government agencies.

► Aggregate supply (curve):Aggregate supply (curve): the amount of the amount of Keynesian real output that is produced by Keynesian real output that is produced by producers of products at different price producers of products at different price levels plus the real amount of government levels plus the real amount of government production.production.

Graph of Aggregate Supply Graph of Aggregate Supply CurveCurve

Why Aggregate Supply Might Be Why Aggregate Supply Might Be Higher At Higher Price LevelsHigher At Higher Price Levels

►Possibility 1: firms produce a larger Possibility 1: firms produce a larger output at higher price levels than they output at higher price levels than they produce at lower price levels.produce at lower price levels.

►Possibility 2: firms charge higher Possibility 2: firms charge higher prices for higher quantities of goods, prices for higher quantities of goods, perhaps because they must do so in perhaps because they must do so in order to hire more resources.order to hire more resources.

Aggregate Supply Curve vs. Aggregate Supply Curve vs. Ordinary Supply CurveOrdinary Supply Curve

►The ordinary supply curve is a marginal The ordinary supply curve is a marginal cost curve. cost curve.

► It represents the cost to the marginal It represents the cost to the marginal entrepreneur of producing the next entrepreneur of producing the next unit. unit.

► It also represents the utility foregone It also represents the utility foregone when resources are not used to help when resources are not used to help cause other goods to be produced and cause other goods to be produced and consumedconsumed.

Model Of Macroeconomic Model Of Macroeconomic Equilibrium: Figure 13-3Equilibrium: Figure 13-3

Explanation of Figure 13-3Explanation of Figure 13-3

►Macroeconomic equilibrium (figure 13-3): the Macroeconomic equilibrium (figure 13-3): the combination of price level and real output at combination of price level and real output at which aggregate demand equals aggregate which aggregate demand equals aggregate supply, i.e., where the aggregate demand supply, i.e., where the aggregate demand curve and the aggregate supply curve cross. curve and the aggregate supply curve cross. Firms would not want to produce a larger Firms would not want to produce a larger quantity than qquantity than qee..

Adjustment In Price Level And Real Adjustment In Price Level And Real Output If The Macroeconomy Is Out Of Output If The Macroeconomy Is Out Of

EquilibriumEquilibrium ► At pAt p1 1 in figure 13-3, producers would produce in figure 13-3, producers would produce

goods that they cannot sell. At such a price goods that they cannot sell. At such a price level, consumers would feel too poor to buy level, consumers would feel too poor to buy all the consumer goods that have been all the consumer goods that have been produced. The price level would tend to fall produced. The price level would tend to fall leading businesses to cut back production.leading businesses to cut back production.

► At pAt p22 in figure 13-3, producers will have in figure 13-3, producers will have produced a lower real output than the produced a lower real output than the spending that consumers, businesses, and spending that consumers, businesses, and the government want to do. The price level the government want to do. The price level would tend to rise leading business would tend to rise leading business investment to increase, thereby increasing investment to increase, thereby increasing real output.real output.

Demand And Supply ShocksDemand And Supply Shocks

►Demand shockDemand shock: a shift in the aggregate : a shift in the aggregate demand curve – households, firms or demand curve – households, firms or government want to spend more or less government want to spend more or less than before at each price level.than before at each price level. Cause? A change in confidence, perhaps due to a Cause? A change in confidence, perhaps due to a

change in housing prices or a change in the stock change in housing prices or a change in the stock market, a particularly cold winter, or a storm-market, a particularly cold winter, or a storm-prone summer.prone summer.

► Supply shock:Supply shock: a shift in the aggregate a shift in the aggregate supply curve – firms want to supply more or supply curve – firms want to supply more or less than before at each price level.less than before at each price level. Cause? A disaster that affects energy supplies, a Cause? A disaster that affects energy supplies, a

major technological advance.major technological advance.

Effects Of A Demand Shock:Effects Of A Demand Shock: Figure 13-4 Figure 13-4

Effects Of A Supply Shock:Effects Of A Supply Shock: Figure 13-5 Figure 13-5

Two Kinds Of Macroeconomic Two Kinds Of Macroeconomic PolicyPolicy

►Fiscal policy.Fiscal policy.

►Monetary policy.Monetary policy.

Fiscal Policy To Affect Fiscal Policy To Affect Equilibrium Real OutputEquilibrium Real Output

►Fiscal policyFiscal policy: increases and decreases : increases and decreases in government spending and consumer in government spending and consumer taxation.taxation.

►Expansionary fiscal policyExpansionary fiscal policy: reducing : reducing taxes and/or raising government taxes and/or raising government spending.spending.

►Contractionary fiscal policyContractionary fiscal policy: raising : raising taxes and/or reducing government taxes and/or reducing government spending.spending.

Expansionary Fiscal PolicyExpansionary Fiscal Policy

► Keynesians believed that this policy could Keynesians believed that this policy could maintain real output and employment at maintain real output and employment at high levels. It could insure that firms would high levels. It could insure that firms would not make losses.not make losses.

► They believed that it can prevent a They believed that it can prevent a contractionary phase in the business cycle contractionary phase in the business cycle and, therefore, prevent the unemployment and, therefore, prevent the unemployment rate from falling below a target level.rate from falling below a target level.

► Reducing taxes raises consumer spending Reducing taxes raises consumer spending (C). Both this and increased government (C). Both this and increased government spending (G) raise aggregate demand. spending (G) raise aggregate demand.

Contractionary Fiscal PolicyContractionary Fiscal Policy

►Keynesians believed that this policy Keynesians believed that this policy can prevent or moderate the can prevent or moderate the expansionary phase of a business expansionary phase of a business cycle and control inflation.cycle and control inflation.

►Raising taxes would reduce consumer Raising taxes would reduce consumer spending (C). Both this and a reduction spending (C). Both this and a reduction in government spending (G) would in government spending (G) would reduce aggregate demand.reduce aggregate demand.

Popular Keynesian Beliefs Popular Keynesian Beliefs About Fiscal PolicyAbout Fiscal Policy

►1. Keynesians believed that expansionary 1. Keynesians believed that expansionary fiscal policy can prevent or moderate the fiscal policy can prevent or moderate the contraction phase of the business cycles contraction phase of the business cycles and, therefore, maintain real output at a and, therefore, maintain real output at a high level and reduce unemployment.high level and reduce unemployment.

►2. Keynesians believed that contractionary 2. Keynesians believed that contractionary fiscal policy can prevent or moderate the fiscal policy can prevent or moderate the expansionary phase of a business cycle expansionary phase of a business cycle and, therefore, help control inflation.and, therefore, help control inflation.

Full Employment EquilibriumFull Employment Equilibrium

►The goal of Keynesian fiscal policy is The goal of Keynesian fiscal policy is full employment equilibrium. full employment equilibrium.

►Full employment equilibriumFull employment equilibrium: a : a macroeconomic equilibrium at which a macroeconomic equilibrium at which a target level of unemployment is target level of unemployment is achieved – also called full employment achieved – also called full employment GDP (gross domestic product).GDP (gross domestic product).

►GDP, adjusted for inflation, is a GDP, adjusted for inflation, is a statistical measure of real output. statistical measure of real output.

Three Models Of Full Three Models Of Full Employment Equilibrium: Figure Employment Equilibrium: Figure

13-613-6

Actions Needed To Achieve Full Actions Needed To Achieve Full Employment Equilibrium Employment Equilibrium

►Left panel: full employment economy – Left panel: full employment economy – no action necessary.no action necessary.

►Center panel: unemployment economy Center panel: unemployment economy – expansionary fiscal policy needed to – expansionary fiscal policy needed to achieve full employment equilibrium.achieve full employment equilibrium.

►Right panel: inflation economy – Right panel: inflation economy – contractionary fiscal policy needed to contractionary fiscal policy needed to achieve full employment equilibrium.achieve full employment equilibrium.

Keynesian Views On NegativeKeynesian Views On NegativeSupply ShocksSupply Shocks

►1. Expansionary fiscal policy can offset 1. Expansionary fiscal policy can offset the effects of negative demand the effects of negative demand shocks.shocks.

►2. Expansionary fiscal policy can offset 2. Expansionary fiscal policy can offset the effects of negative supply shocks.the effects of negative supply shocks.

Mediating The Effects Of Mediating The Effects Of Negative ShocksNegative Shocks

► Beginning with a full employment Beginning with a full employment equilibrium, assume that there is a negative equilibrium, assume that there is a negative demand shock. The center panel of figure demand shock. The center panel of figure 13-6 can be used to represent the resulting 13-6 can be used to represent the resulting unemployment economy. To mediate the unemployment economy. To mediate the effects, the government could raise effects, the government could raise aggregate demand.aggregate demand.

► The same reasoning applies to a negative The same reasoning applies to a negative supply that shifts a full employment supply that shifts a full employment economy to an unemployment economy.economy to an unemployment economy.

Monetary Policy To Help Achieve Monetary Policy To Help Achieve Full Employment Price Full Employment Price

Stabilization Stabilization ►Two types of monetary policy:Two types of monetary policy:

1. Expansionary monetary policy: central bank policy that is intended to raise aggregate spending by increasing business investment spending (I).

2. Contractionary monetary policy: central bank policy that is intended to reduce aggregate spending by reducing business investment spending (I).

Keynesian Views On Monetary Policy

►1. If the economy is an unemployment economy, expansionary monetary policy can increase investment demand and raise the equilibrium real output to the full employment level.

►2. If the economy is an inflation economy, contractionary monetary policy can reduce investment demand and reduce the equilibrium real output to the full employment level, thereby reducing the price level.

An Analogy: Bringing AAn Analogy: Bringing A Pot To Its Boiling Point Pot To Its Boiling Point

► If it overheats, If it overheats, turn down the turn down the heat.heat.

► If it is not hot If it is not hot enough turn up enough turn up the heat.the heat.

Knowledge Needed to Achieve Knowledge Needed to Achieve Keynesian GoalsKeynesian Goals

►The problem of timing and placing the The problem of timing and placing the Keynesian policy so that it exactly Keynesian policy so that it exactly offsets the demand or supply shock.offsets the demand or supply shock. Government agents must know when a Government agents must know when a

shock is likely to occur.shock is likely to occur. Government agents must know the Government agents must know the

particular industries that are effected, the particular industries that are effected, the nature of the effects, and when they will nature of the effects, and when they will occur.occur.

Problems in a DemocracyProblems in a Democracy

►Fiscal policy requires legislation which, in a Fiscal policy requires legislation which, in a democracy, may take a long time to pass.democracy, may take a long time to pass.

►Monetary policy is easier to put into effect. Monetary policy is easier to put into effect. However, its affects are much broader. It However, its affects are much broader. It cannot pinpoint specific industries.cannot pinpoint specific industries.

► Improperly timed and placed fiscal or Improperly timed and placed fiscal or monetary policy could have effects that monetary policy could have effects that are just the opposite of those desired by are just the opposite of those desired by the Keynesians.the Keynesians.