THREE SCHOOLS OF ECONOMICS
Classical
- savings (leakage) = investment (injection)
- Adam Smith & John B. Say & David Ricardo & Alfred Marshall
- competition is good
- supply creates it's own demand
- output is demand (produced)
- aggregate supply determines output
- invisible hand ( market functions on its own without government intervention)
- laissez faire
- savings increase with interest rate
- aggregate supply = aggregate demand at full employment equilibrium
- in the long run, the economy will balance at full employment
- economy is always close to or at full employment
- trickle down effect (help the rich first, then help everyone else later)
- prices and wages are inflexible downwards
Keynesian
- savers are not investors
- John Maynard Keynes
- competition is flawed
- aggregate demand is key and aggregate supply is flawed
- aggregate demand determines output therefore demand creates its own supply
- savers and investors save and invest for different reasons
- savings are inverse to interest rates
- leaks cause constant recessions
- saving cause recessions
- ratchet effects and sticky wages block Say's Law
- prices/wages are flexible downward
- no mechanism is capable of guaranteeing full employment
- in the long run, we are dead
- the economy is not close to or at full employment
- government intervention
- government will had stabilizers
- will use expansionary and contractionary policy
- use fiscal policy
Monetary
- Allen Greenspan
- Ben Bernanke
- fine tuning is needed
- Congress cannot time the policy options
- voters won't allow contractionary policies
- easy money, tight money
- change requires reserves if needed
- buy and sell bond on open market
- can change interest rates for discount rate and federal fund rate
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