Macroeconomic Theories Classical Keynesian versus New Classical Supply
- Slides: 11
Macroeconomic Theories Classical & Keynesian versus New Classical & Supply Side
CLASSICAL VIEW 1. 2. 3. 4. 5. 6. 7. 8. Markets are naturally self regulating No government intervention necessary Recessions are temporary Wages & prices are flexible Savings = Investment Says law: Supply will create its own demand Against: minimum wages, welfare & Gov’t assistance Great Depression challenged Classical View
9 -2 b Classical View FIGURE 9 -1 Aggregate Supply and Aggregate Demand in Classical Economics
KEYNSIAN VIEW 1. 2. 3. 4. 5. 6. 7. 8. Economy is inherently unstable & not self adjusting Recessions are long & often permanent Major government intervention necessary to stimulate AD Wages & prices are sticky or fixed Support welfare & Gov’t assistance Lack of consumer demand caused great depression AS curve is very flat or horizontal Interest rates changes are not effective during recession – Money Demand not very sensitive to interest rates
Keynesian View
Macroeconomic Debates • Two major schools decidedly against government intervention have developed: – Monetarism & New Classical Economics
Monetarism • Main message: money matters & the economy self-regulates • Monetarism believes in the Quantity Theory of Money – MV = PQ, Inflation is purely a monetary phenomena • Generally do not advocate activist monetary policy stabilization: – expanding money supply during bad times and slowing during good • Focus on price stability • Theory not compatible with upward sloping AS curve
New Classical • • Attempted to explain stagflation of 1970’s Business Cycles happen, but recessions are temporary AS could be broken down into Short-run & Long run curves Government intervention is unnecessary –Prices/wages are flexible in long run, sticky in short-run • People make decisions on rational expectations –This explains “shocks” to the system
9 -2 l New Classical Model Both models can be used as a “New Classical Model” LR FIGURE 9 -5 Aggregate Supply in the New Classical Model SRAS
Supply-Side Policy • Government Incentives Matter • Goal: use incentives to shift the aggregate supply curve right • The supply-side toolbox consists of: – – Tax cuts to stimulate work effort, saving, and investment Deregulation to reduce production cost/stimulate investment. Expenditures on education training/research expands capacity to produce Immigration policies alter the size/skill of labor force
9 -4 Summary • No theory is designed to explain all the complex relationships of a macroeconomy • There is no simple relationships that can be easily manipulated to neatly solve various problems as they arise. • Assessing economic theories would be easier if we lived in closed economies.
- New classical and new keynesian macroeconomics
- New classical and new keynesian macroeconomics
- Neoclassical economics
- Classical versus keynesian economics
- Supply vs demand side economics
- Classical keynesian and monetarist
- Keynesian vs classical vs monetarist
- Classical economics vs keynesian
- Monetarist vs classical economics
- Keynesian and classical theory
- Keynesian policy
- Keynesian economics policy