Today’s Agenda Mercantilism is Dead The Birth of Classical Economics The Invisible Hand Keynes’s Prescription for Depression The Battle for Economic Supremacy! Can You Spot The Economist?

Review: Mercantilism Mercantilism was the dominant economic system during the period of the 1500-1700’s

Review: Mercantilism Country’s wealth came from gold and silver Maximize wealth through: - Government regulated trade - Favorable balance of trade More exports Fewer imports

Review: Mercantilism MOTHER COUNTRY Colony sent raw materials to Mother Country Colony MOTHER COUNTRY Mother Country sold finished goods back to Colonies Colonies were not allowed to trade with each other

Smith vs. Keynes: The Battle for Economic Supremacy Adam Smith 1776 John Maynard Keynes 1936 VS

Let’s Investigate Form 4 Groups Groups 1 & 2: Adam Smith Groups 3 & 4: John Maynard Keynes Fill out your Note Sheet as you go Use the Word Wall to help with terms

Reading Strategies & Word Wall Reading Strategies to Try: 1. Underline any sentences that you think answer prompts on your Note Sheet. 2. Circle any words whose meaning you can’t figure out by reading the words around it. Tariff - A tax paid on an import or an export to control trade Multiplier – The factor by which gains in total output are greater than the change in spending that caused it. (e.g. Investing $100, can stimulate economic growth of $500) Countercyclical Policy - Increase spending when economy is down and vice-versa Deficit Spending – Budgetary spending that exceeds revenues (income)

Smith: the Father Wrote “Wealth of Nations” in 1776 End of Mercantilism Advocated for Laissez-Faire system of government Belief in the “Invisible Hand”

Keynes: The (Prodigal) Son Active during the 1920s and 1930s Advocated for active government intervention in the economy Countercyclical monetary policy Economies that run on debt Economic growth is growth in GDP

Application Today How Do We See Smith’s Influence Today? How Do We See Keynes’s Influence Today? Classical or “monetarist” policy Austerity: raise taxes, reduce government spending to reduce deficits Austerity is common in Europe, but not popular Deficit hawks hate Keynes Countercyclical: reduce government spending during growth, increase during recession Tendency to create or increase government debt Usually includes “stimulus” Great Recession bail-outs and government lending and purchasing

Check For Learning For each example, determine if the action is classical or Keynesian. In 2009, Greece closes down its state-owned television stations to try to reduce government spending. The government of France buys 20,000 wheels of French cheese in a bid to prop up the stinky cheese industry during a downturn.

Check For Learning The United States Congress passes tax cuts that leave an extra $500 in each taxpayer’s pocket during a recession. Wisconsin raises sales tax to 14% and cuts all funding for public schools to balance the budget. The Federal Reserve sells an extra $30 billion worth of bonds during a period of sustained economic growth.

Questions?