SupplySide vs Demand Side Economics John Maynard Keynes

Supply-Side vs. Demand Side Economics

John Maynard Keynes the face of Demand -Side � One of the most influential economists of 20’th century. � Believed only the government is large enough to offset changes in investment spending.

Demand-Side Policies �A change in investment spending will have a magnified effect on total spending � When a change in investment spending is caused by a change in overall spending, a downward economic spiral may begin � Investment spending is a multiplier. . about 2 today. -I=S(2)

Demand-side � Unemployment insurance and federal entitlement programs work to stabilize the economy. � In the long run, all attempts by the government to increase aggregate demand increase the price level without increasing the real GDP.

Faces of supply-side

Supply-Side Policies � Hopes that reducing tax rates would increase tax collections…. failed in the 80’s. (trickle down, Reganomics and Laffer Curvep pg. 451. ) � Successful policies can shift the Ag. Supply and move the economy into equilibrium. � Seek to promote economic growth rather than economic stability.

Monetary Policies � Monetarists believe that $ supply should be allowed to grow slow but steady to control inflation and promote growth. � Monetarists believe that expanding the money supply cannot permanently affect the rate of employment.

Changing Nature of Economic Policy � Discretionary fiscal policy is used less today than it once was……except for at the moment. (did you hear about the GM payback? ) � Automatic stabilizers and progressive income tax work together to stabilize the American Economy. � Declining discretionary policy has increased the influence of monetary policy. � Most members of Congress believe the power to create money should remain with an independent agency, not elected officials.

Why Economists Differ � Economists choose policies that reflect their sense of economic problems and their importance � Economists are affected by economic conditions prevailing in their life-times. ◦ Ex. Hyperinflation or Great Depression vs. Stagflation

Economic Politics � The Council of Economic Advisers advises the president of the US on economic policy. � Economists have contributed a great deal to the understanding of economic activity. They hope to prevent another Great Depression, stimulate growth, and help disadvantaged groups. However, they can not help a country avoid recessions. Will we every know how close we were to a depression?