Is there a Core of Practical Macroeconomics that we should all believe?





Is there a Core of Practical Macroeconomics that we should all believe?

In the article Is there a Core of Practical Macroeconomics that we should all believe? Alan Blinder proposes a macro model that is practical and useful for policy analysis. He begins by identifying the realistic elements of the model, on which he hopes that people should agree. These elements are the IS curve, the LM curve, the Phillips curve, aggregate demand and supply and the Okun’s law. He explains the practical elements and identifies their weak areas within an economic system. The IS curve shows the relationship between real interest rates and real output, but it focuses more on fixed investments as a basis of interest elasticity of spending. Economists continue to focus on the LM curve although it is not useful for policy analysis. Blinder identifies instability in the demand and supply of money as the reason for the change in the use of the LM curve.

Blinder proposes four components of his macroeconomics core model. The first component is the use of equations based on the Phillips curve to show how price and wages change. He identifies the short run nature of prices and wages. The second element involves identifying demand as a determining factor of output in the short run. The third factor of the model recognizes aggregate demand as a component of both fiscal and monetary policies. The fourth component of the model focuses on Okun’s law, which identifies the relationship between increases in output to the rate of unemployment. He follows this by identifying two factors that have led to the failure of the standard macro model, which are the modeling expectations and the term structure of interest rates.

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