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The Power of Macro-101

April 22nd, 2013 · No Comments

Basic macroeconomics made some very counterintuitive predictions about the effects of those shocks. Unprecedented budget deficits, the model said, would not drive up interest rates. A tripling of the monetary base would not cause runaway inflation. Sharp government spending cuts wouldn’t free up resources for the private sector, they would depress the economy more than one-for-one, so that private spending as well as public would fall.Quite a few people considered these predictions not just wrong but absurd; they braced for soaring rates and inflation, they waited for the good news from austerity. But the model passed the test with flying colors.

Paul Krugman via The Power of Macro-101.

Tags: Economics