Section 3 - economic schools Flashcards
what do the classical and monetarist schools of economic thought refer to in terms of prices and wages
refer to a world where prices and wages are fully flexible
what does the keynesian school of economic thought refer to in terms of prices and wages?
describes an economy where price and wages are fixed, or at least slow to adjust
what does the Austrian school of economic thought refer to in terms of prices and wages?
emphasises the role of individual or group actions (or indeed inactions) to understand economic phenomenona. This is sometimes called methodological individualism.
what does methodological individualism emphasise?
the organising power of markets, in that market prices reflect all information, the totality of which is not known to any single individual.
It is this process that determines the allocation of resources in the economy
according to the principle of methodological individualism what does all economic phenomena derive from?
the choices made by individuals based on:
- their knowledge at that time
- their expectations of the future
- the perceived consequences of their own intended actions
what is the most basic principle of classical economics?
the real economy as a whole is self-regulating in that it is always capable of achieving the natural level of real GDP i.e. that associated with the full employment of a countries resources
The economy is usually close to its natural real level through automatic self-adjustment
The economy generates sufficient demand (Say’s law)
what is Say’s law
Related to classical econ
states that when an economy produces a certain level of output/ GDP it also generates the income needed to purchase those gods and hence, ensures that an economy is capable of creating demand sufficient to buy all of the output produced and maintain the natural level of real GDP.
How can Say’s law be changed
if some individuals save some of their income and not all goods produced are bought. In this scenario the economy might not achieve its natural level of output which may lead to unemployment of labour and other resources.
What do classical economists encourage individuals to do with savings
Invest savings and thus add to aggregate demand, restoring the natural rate of GDP
What does classical economics predict when resources are unemployed?
Wages, prices and interest rates will gall leading output to return to its natural level
what did Keynes (Keynesian economics) advocate in terms of fiscal policy?
counter-cycle fiscal policy in which governments would undertake deficit spending to boost investment and consumer spending
What does Keynesian economics distinguish between?
micro and macro economics
What do monetarist economists regard inflation as?
solely being the result of the variations in the money supply rather than as being a consequence of aggregate demand.
What do monetarist economists believe in terms of government?
Government should not indulge in economic stabilisation: markets are competitive and naturally lead to macro-economic stability
what are the doctrines of new classical economics (monetarist)
- individuals behave rationally, collecting and analysing all relevant information about the economy;
- markets are competitive;
- prices adjust to changes in aggregate demand
