Economic Ideolidgies

Question 1

Classical economists

Answer 1

Believe in the power of the market any disequilibrium will be cleared immediately

Prices and wages fully flexible

Says law
Supply creates its own demand (production of goods and services will provide sufficient expenditure to be sold )

Fishers
MV=PY

Quantity theory
P=M
Price is directly related to the quantity of money (supply) in the economy

Crowding out
When increased public expenditure diverts money away from the private sector
Financial (gov spending diverts funds from private firms and loses their funds for investment )
and resource (gov uses labour and resources that would be used by firms)

Question 2

Keynesian

Answer 2

Rejected classical views

Believed disequilibrium could persist as wages and prices are inflexible
Therefore disequilibrium unemployment can persist

Up to the government to intervene in the markets to restore equilibrium employment

Question 3

Monetarism

Answer 3

Resurgence of classical views with a focus on price expectations to explain stagflation

Question 4

New Keynesian

Answer 4

Economists who attempt to explain downward stickiness in real wages and prices

Question 5

New classical

Answer 5

Markets clearing very quickly due to rational expectations

Any attempt to raise AD immediately transpires to price rises

Question 6

Keynes in the labour market

Answer 6

Workers would resist wage cuts

Wages were thus sticky downwards

In a recession when labour demand is low wages might not fall far or fast enough to clear the market

Rejected wage cuts as the solution to demand deficiency-workers are consumers - cut in wage -cut in spending

Firms would respond by reducing demand for L which would more than offset the reduction in wages

Wage rates would not fall fast enough to clear the market -disequilibrium would worsen and so would the recession

Question 7

Keynes loanable funds

Answer 7

Disequilibrium can persist

As AD falls with it business confidence

Demand loanable funds for investment would shrink

Reductions in interest rates would be sufficient to clear the market

Question 8

Keynes on quantity theory

Answer 8

Rejected simple quantity theory

If there is slack in the economy an expansion of the money supply can lead to an increase in output rather than an increase in prices

Question 9

Keynes and multiplier

Answer 9

Keynes argued that there would be a multiplier effect from a change in injections or withdrawals

Question 10

Keynesian use

Answer 10

1950 and 60s then received criticism after mid 69s a

Question 11

Hysteresis

Answer 11

The persistence of an effect even when the initial cause has ceased to operate

In economics it refers to the persistence of unemployment even though the demand deficiency that caused it no longer exists