Fiscal and Monetary Policy Macroeconomics Fiscal and Monetary Policy Purpose: Classify economic thinkers based upon beliefs.

I. Goals Explain the differences between Classical and Keynesian economic theory and how each developed. Illustrate how Classical and Keynesian theory operates through a simple circular flow diagram. Explain the development of neo-classical schools and new Keynesian theory.

II. Classical vs. Keynesian Economic Theory Laissez- faire/ non-activists Say’s Law – “Supply creates its own demand.” Dominant school of economic thought until the Great Depression. Keynesian Government intervention needed/ activists John Maynard Keyes– “Demand creates supply.” Emerged in the 1930’s and remains fairly prominent.

III. Other Economic Schools Monetarism Fiscal policy should not be used to remedy recessions FED should maintain long-run growth plan with the money supply. Supply-Side Economics (Reaganomics) Return to a more classical outlook on Macroeconomic theory. Economic growth will be most effective when investing in capital and lowering production costs. The Chicago School Neoclassical school of thought, attributed with the University of Chicago. Based on the theory of rational expectations. Stemmed from the Austrian School.