Macro Theories Keynesian Classical Lesson8 Macro Theories Keynesian Classical

Summary There are two basic schools of thought in Economics.. Classical Keynesian

Classical – the natural market forces Keynesian – solving problems with market intervention – money.

Classical – the hidden hand Keynesian – the helping hand Classical – the natural market forces Keynesian – solving problems with market intervention – money.

Keynesian Economics 1 Keynesian economists generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high) and stagflation!!! These can be mitigated by economic policy responses,

Keynesian Economics 1  Monetary policy actions by the CB and fiscal policy actions by the government, which can help stabilize output over the business cycle.  Keynesian economists generally advocate a managed* market economy – predominantly private sector, with an active role for government intervention particularly during recessions and depressions. As opposed to Free

(New) classical theorists demanded that macroeconomics be grounded on the same foundations as microeconomic theory, profit-maximizing firms and rational, utility-maximizing consumers. 10 principles of Economics + Economic Theorists

Quantitative Easing

Impact of Currency Devaluation Valuation of currencies Shows “value” of relative economies GDP growth Productivity Efficient use of factors of production

Why Devaluation Increasing net imports = more imports than exports…

Impact of Currency Devaluation What will happen to Supply Side? What will happen to Aggregate Demand

Fiscal Policy Direct taxes – on incomes on Wealth Normally progressive Indirect taxes – on spending - buying Not normally on essentials such as food Hybrid on output Value added Tax

Fiscal Policy Value added Tax Difference between input costs and output prices EG.

Fiscal Policy Tax avoidance Tax evasion

The Multiplier Effect Government spending of increased taxes on supply side will increase income and then lead to increase in consumer spending