(2-24-16) Unit III Classical vs. Keynesian

Classical vs Keynesian

Classical

-Followers:Adam Smith, J.B. Say, David Ricardo, Alfred Marshall

-Say's Law:

supply creates own demand

production= income= spending

under-spending is unlikely

whatever output is produced will be [in] demand

-Savings and investment:

savings=investment income

savings (leakage)= investment (injection)

-Loanable funds market

-Wage/Price Flexibility:

Downward

-Supply Curve:

Verticle

-Output and Employment

Determined by AS

-Unemployment

Rarely exists because of wage/price flexibility

Cause: External [war]

-Aggregate Demand

Determines PL

Stable is money is supplied/supply is stable

-Equation (Basic)

MV=PQ

1965-1972

-Role of Government

Monetary policy maintains steady money supply

Laissez-faire is best

Self regulating economy

-Inflation

caused by too much money 

-How Long is the Short Run

short time

-Emphasis today

Microeconomics

-ETC[other]

Competition is good

Invisible hand

Long-run Balance at FE

Trickle Down Effect- rich first, everyone else later

Keynesian

-Followers: J.B. Keynes

-Say's Law

Depressions refute Say's law

Demand creates its own supply

Underspending persists

-Savings and investments

-savings is not equal to investment

different motivations

-savings: future needs, precaution, habit, income level, and interest rate

-investments: interest rate, rate of profit, expectations

-Loanable Funds Market

Investment from savings, cash, checking accounts

Lending creates money->supply of money increases

Inflation and unemployment are unstable

-Wage/Price Inflexibility

Prices and wages are inflexible downward: Ratchet effect

-Supply Curve

Horizontal

-Output and Employment

Determined by Ad

-Unemployment

Usually exists

Causes: external [war] internal [savings not equal to investment]

-Aggregate Demand

changes due to determinants

unstable even if money supply/supplied is stable due to fluctuations in investment spending

-Equations [Basic]

C+Ig+G+Xn

1973-Present

-Role of Government

Fiscal Policy- Tax and spend

Active government

Economy is not self regulating

-Inflation

caused by too much demand

-How long is the short run

Long time

-Emphasis today

Macroeconomics

-ETC[other]

Flawed competition

AD is key;not AS

Leaks+Savings=Recession

Ratchet effects and Sticky Wages block Say's law

We are doomed in the long run