Macroeconomic Theories

Slides:



Advertisements
Similar presentations
Until Great Depression, government did little to influence economy persistent unemployment, low production changed many economists minds John Maynard.
Advertisements

Economics – Mr. Graboski 10/3/11 Do Now: If the American economy is in a downward spiral, should the federal government step in with increased spending.
FDR Fiscal Policy Taxes Government Spending GDP Aggregate Demand Aggregate Supply Budgets Keynesian Economics Solving Economic Problems.
Taxes, Fiscal, and Monetary Policies
Classical vs. Keynesian Economists Which model best describes our economy?
Fiscal Policy 1.
1 Chapter 20A Practice Quiz Tutorial Policy Disputes Using the Self- Correcting Aggregate Demand and Supply Model ©2000 South-Western College Publishing.
Unit 5 - Models of Output Determination n Two Primary Schools of Economic Thought are: 1. Classical Economics (Smith, Ricardo, Von Mises, Say, Hayek, Hazlitt,
FISCAL POLICY Inflation Real GDP AS 1 AD 1 AD 2 Economy in recession, Unemployment = 9.1% Expansionary Fiscal Policy needed Lower Taxes & ↑ Gov’t spending.
Agenda Anything new? Chapter 35…a quick review Homework Chapter 35 Questions 1, 2, 3 Problem 1 Intro to Chapter 36 Homework Read Chapter 36 Question 6.
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Unit 3-4: Aggregate Demand and Supply and Fiscal Policy 1.
Chapter 12Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010-
Chapter 12 Government Decisions and Economic Success.
Classical and Keynesian Economics 11-1 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 19 Introduction to Macroeconomics © 2009 South-Western/ Cengage Learning.
Chapter 12 Government Decisions and Economic Success.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Fiscal Policy (Congress) the economy Government Intervention in the Free Market?: How Congress can try to speed up or slow down.
Fiscal Policy Government Intervention in the Free Market?
Fiscal Policy. Purpose The use of government spending and revenue collection (taxes) to influence the economy.
Fiscal Policy: Fixing an Economy’s Health What is Fiscal Policy? The use of Government policies in order to stabilize the Business Cycle.
Principles of Macroeconomics Lecture 3a THEORIES OF OUTPUT DETERMINATION.
Macroeconomic Theories
Encouraging Growth Cause: increased government spending raises output and creates jobs Cause: Tax cuts allow individuals to have more money to spend and.
Fiscal Policy: Fixing an Economy’s Health Points to Remember  Prior to the Great Depression (1930’s) economists believed that the best way to stabilize.
AGGREGATE SUPPLY. MR. CLIFFORD-HEAVY DAY This is a Mr. Clifford-heavy day! Since Mr. Clifford is dabomb.com, we shall give him due reverence with patience.
January 12th Agenda CBM CBM In the News In the News Entrepreneurship Posters & Presentations Entrepreneurship Posters & Presentations Monetary Policy Power.
Fiscal Policy (Congress) the economy Government Intervention in the Free Market?: How Congress can try to speed up or slow down.
Short-Run Economic Fluctuations Business Cycle Expansion Peak Contraction Trough.
Unit 3: Aggregate Demand and Supply and Fiscal Policy 1.
Unit 3: Aggregate Demand and Supply and Fiscal Policy 1.
The Government & Fiscal Policy
Fiscal Policy Use of gov’t spending & revenue collection to influence the economy Fiscal Year-Fed Gov’t-Oct 1-Sep 30 Appropriations Bill-sets $ aside for.
Classical vs. Keynesian
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Macroeconomic Equilibrium
Fiscal Policy.
Ch 15 – Fiscal Policy.
Fiscal Policy.
Fiscal and Monetary Policy
Fiscal Policy.
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Classical and Keynesian Theory
Macroeconomics The Big Picture.
Keynesian vs New Classical
Fiscal Policy.
Section 6.
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Supply Shocks AS/AD Model Analysis.
SSEMA3-Explain how the government uses fiscal policy
Macro Final Topic Review
Macroeconomic Theories
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Fiscal and Monetary Policy
Supply Shocks AS/AD Model Analysis.
Government Intervention in the Free Market?
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Quantitative Easing & Austrian Economics
Unit 3: Aggregate Demand and Supply and Fiscal Policy
Chapter 15 Fiscal Policy.
Aggregate Equilibrium
POLICY: government rules.
Classical and Keynesian Macro Analysis
10 AGGREGATE SUPPLY AND AGGREGATE DEMAND. 10 AGGREGATE SUPPLY AND AGGREGATE DEMAND.
Chapter 15 Fiscal Policy.
Fiscal Policy Options.
Ways to address Unemployment
QUESTION #1 1b) Both Prices & Wages are sticky in the short run which causes QTY supply to rise as inflation Examples Price Level ↑ => nominal prices.
Government Intervention in the Free Market?
Presentation transcript:

Macroeconomic Theories Classical vs. Keynesian Economics

Reading Read Keynesian Handout

CLASSICAL Economists Markets are naturally self regulating Classical economists were the 1st school of economic thought starting in 1776 Adam Smith was the founder and they believed: Markets are naturally self regulating No government intervention necessary Recessions are temporary Great Depression challenged Classical View

KEYNESIAN VIEW Economy is inherently unstable not self regulating Recessions can be long & permanent Major government intervention necessary Became popular after Great Depression (think FDR) Support welfare and government assistance Stagflation challenged Keynesian view John Keynes: Founder of Keynesian Economics 1883-1946

Economic Schools of Thought NeoClassical Economics |--------------------------------| Classical Economics |----------------------------| Keynesian Economics |----------------------------| 1800 1929 1980 2008 1936 1979 Great Depression? Prices were not flexible! What Now? Housing Bubble Now What? Keynesian Economics did not help here!

How to Fix U.S. Economy? USA Economy --------- -------- Price Level P1 LRAS1 Price Level Real GDP SRAS1 AD1 -------- --------- P1 Y1 E1

Let Prices & Wages Adjust? (60 minutes video: Buy American) Free Trade Protectionist => policies to reduce trade

Keynesian vs. Classicial AS/AD Model “Keynesian Gov’t Intervention AS/AD Model “Classical Self Regulation” LRAS1 Price Level Real GDP SRAS1 LRAS1 Price Level Real GDP SRAS1 SRAS2 AD1 AD1 -------- --------- P1 Y1 E1 AD2 -------- --------- P1 Y1 E1 End Result: Same Real GDP & Employment Keynesian leads to more debt & higher price level

End Day 1

Theory – Period Challenged Classical Theory - Great Depression (1929) Keynesian Economics- Stagflation (late 1970’s) Neo-Classical Theory Great Recession (2008)

Economy is too slow => Review: Classical vs. Keynesian “Do Nothing=> let prices adjust” or Economy is too slow => Help now! => use expansionary Fiscal Policy

Keynesian vs. Classical Keynesian economists felt recessions could be long/permanent More AD was needed to “fix” economy => so cut taxes & ↑ Gov’t Spending Classical economists felt recessions would “self regulate” because prices would fall which would lead to more jobs SRAS shifts right whenever prices adjust lower

Worksheet #2

Keynesian vs. Classicial “Keynesian Gov’t Intervention “Classical Self Regulation” LRAS1 Price Level Real GDP SRAS1 LRAS1 Price Level Real GDP SRAS1 SRAS2 AD1 AD1 P2 -------------- E2 -------- --------- P1 Y1 E1 AD2 -------- --------- P1 Y1 E1 P2 -------------- Y2 Y2 End Result: Same Real GDP & Employment Keynesian leads to more debt & higher price level

Supply & Demand Free Response Computers

Economists often Disagree Are tax cuts good or bad? Do Large Deficits always raise interest rates? Will taxing “rich” people significantly lower GDP? The answer to most economic questions is: IT DEPENDS!