3 Economic theories Flashcards
3 Economic theories
keynesian
classical
monetarism
classical economics
hayes
laissez faire environment
unrestricted workings of markets and pursuit of individual interests
long run
4 key assumptions of classical economics
flexible prices and wages (vertical SRAS)
say’s law (demand=supply)
savings=investment
full employment is the norm
strengths of classical economics
monetary rule = more structure on monetary policy
tigher money = contractionary
credit bubbles (loose monetary policy)
weakness of classical economics
assuming entrepreneurs to be dumb
the Fed raised rates which cause inflation
Keynesian economics
use fiscal (MORE important) and monetary policy (stabilizing factor)
short run = sticky prices and wages
discretionary policy
keynes theory
short run effects of shifts in AD on AD/AS graph
SRAS curve is upward sloping
shift in AD will affect the output and employment as well as prices
classical SRAS
vertical
Keynes SRAS
upward sloping
rational expectations theory
individuals base their decisions on 3 primary factors
(their human rationality
information available to them
their past experiences)
strength of keynesian economics
explains a good deal of real world fluctuations
weakness of keynesian economics
not all economic downturns are because of AD
fiscal policy doesn’t always work
more of a diagnosis than a cure
monetarism economics
focuses on economic management
stresses monetary policy and monetary supply
discretionary policy
GDP will grow steadily if the MS grows steadily
increase importance of Fed and decrease importance of fiscal policy
strength of monetarism economics
predicts and explains on central bank of money growth
weakness of monetarism economics
won’t know which money supply to change to control the rate of growth
too much discretionary monetary policy can destabilize economy
keynesian view
fiscal policy
velocity is not stable or predictable
no monetary rule policy
money supply needs to be adjusted
monetarism view
monetary rule
velocity is stable and predictable
the Fed cannot predict short run in velocity
adjustments in money will be wrong and destabilizing
supply side fiscal policy
government policies designed to increase production by reducing Buisness taxes and/or regulation
in long run = wage and cost increase
why is supply side fiscal policy controversial
disproportionately benefit the wealthy
assumes that corporations will spend tax cuts on investments rather than payout shareholders
who created classical
Adam smith
hayek
who created keynseian
keynes
who created monetarism
milton friedman
what grows the economy
productivity
(NOT GOVERNMENT SPENDING)
