3 new economics

Question 1

3 model and 4 key things

Answer 1

Real Buisness cycle
Primary foucse on the belief that aggregate supply changes before aggregate demand
1. The concept of short run v long run is wrong; there is no difference
2. The real business cycle is due to shifts in AS that lead to shifts in AD
3. Shifts in AS are due primarily to disruptions (advances in technology)
4. Supposedly short run effects are just temporary deviations from the long run trend in GDP

Question 1

2 model and 4 key things

Answer 1

Rational Expectations
Primary focus is people and institutions as active players in economy
1. People/institutions develop expectations based on the impact of government policies (both fiscal and monetary)
2. These rational expectations lead people/institutions to anticipate the politices and take steps to prevent any negative impacts (negative impacts are the power of the policies)
3. Repeated use of the same policies lead to quicker and more complete negation of the policies (policies do not work)
4. If the policies do not work then the Classical Model must be fundamentally correct

Question 2

1 model and 4 key things

Answer 2

Supply- side economics
Expand Aggregate Supply at a faster rate
1. Taxes should focus on promoting savings/investment instead of consumption
2. Lower income taxes, esp for wealthy, will stimulate business investment and workers to work more hours. This leads to more growth and tax revenue for the government (deficits reduced)
3. Reduced regulation will stimulate more business investment
4. Reduced/ Eliminated government deficits will lower interest rates that stimulate business investment (do not raise taxes to achieve; cut gov spending)