Macro theories over the years

Question 1

3 time stamps

Answer 1

classical/ neoclassical theory
Keynesian/ new keneysian theory
monetarism/ new classical theory

Question 2

What is crowding out?

Answer 2

Theory stating that government spendings can have negative effects on the private sector

Question 2

classical/ neoclassical theory
until 1935

Answer 2

• Instead of price mechanism the market can ‘heal’ itself
• consequence: lasting equilibrium & full-employment
• monetary policy shows no effect. Also fiscal policies don’t lead to crowding out (no impact on production level, national income or employment)
• Say’s Law (Aggregated supply (total amount of goods supplied) is determined by the factor endowment (resources which can be used) & is always demanded)

Question 3

What is Say’s Law?

Answer 3

The production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is the source of demand

Question 4

What is aggregate supply?

Answer 4

The total amount of goods (including services) supplied by businesses within a country at a given price level

Question 5

What is the factor endowment?

Answer 5

The resources a country can use for economic activity, such as land, minerals, capital, and labor

Question 6

Keynesian model 1936
&
New Keynesian model 1990s

Answer 6

• Focus: unemployment & under-utilization of factors of production
• have lasting equilibrium in combination with un(der)employment which resulted from too low aggregate demand
• Causes: market imperfections (rigid wage & price)
• government starts intervening by countercyclical fiscal policies
• monetary policy is ineffective (liquidity trap & low interest rate sensitivity of investment (interest rate has little impact on investment levels (so monetary policy has little to no effect)) )

Question 7

What are countercyclical fiscal policies?

Answer 7

policy measures which counteract the effects of the economic cycle.
eg, counter-cyclical fiscal policy actions when the economy is slowing would include increasing government spending or cutting taxes to help stimulate economic recovery

Question 8

What is the monetary policy?

Answer 8

Central banks controlling the overall supply of money that is available

Question 9

What is a liquidity trap?

Answer 9

When consumers & investors hoard money

Question 10

Monetarism since 1956
&
New Classical Theory 1970s

Answer 10

• Concern: inflation problem
• discretionary (ad hoc) interventions (eg fiscal & monetary policy) are responsible for cyclical behavior of the economy
• the private factor is relatively stable if price mechanism works properly
• market forces are sufficient to secure a ‘natural’ (ie market clearing) level of employment
• policy advice: rule-based money growth

Question 11

What is the fiscal policy?

Answer 11

the use of government spending and taxation to influence the economy.

Question 12

What is market clearing?

Answer 12

the price at which the quantity supplied equals the quantity demanded