Presentation 1- Keynesian/Classical/Monetarist Balance of Payments Macro Chapter 17 Presentation 1- Keynesian/Classical/Monetarist Balance of Payments

Classical Economics Started with Adam Smith in 1776 Dominant theory of economics through the 1930s Belief that “Laissez-Faire Economics” is best--- government should let it be because full employment is the norm

Classical Economics Contd The AS curve is vertical and is the sole determinant of output The downsloping AD curve is stable and determines the price level

Classical Economics Classical Theory AS P1 Price Level P2 AD1 AD2 Qf b P1 Price Level c P2 AD1 AD2 Qf Real Domestic Output

Say’s Law The idea that supply creates its own demand When supplying goods, workers earn money and then spend $$ on goods/services $$ that is saved is then loaned out and spent as well

Keynesian View Product prices and wages are downwardly inflexible AD is unstable Government intervention is needed to maintain economic stability Horizontal AS curve up to Qf And then it is vertical or Upsloping intermediate range

Keynesian Economics Keynesian Theory AS Price Level P1 AD1 AD2 Qu Qf x Price Level P1 AD1 AD2 Qu Qf Real Domestic Output

Theory of Rational Expectations The idea that people learn to anticipate government interventions They act according to how the government will act Ex- if people expect government spending or the $$ supply to increase (which increases AD and P) they will demand more wages to offset the inflation which will negate the gov’t policy

Monetarist View Changes in the money supply are the greatest determinant of economic growth and the business cycle. The government should keep the money supply fairly stable to control inflation- expand the money supply slightly over time to keep up with growth

Quantity Theory of Money Velocity and Q are stable (in the MV = PQ equation) Increasing the money supply will have a direct effect on price (increase)

Balance of Payments A net statement of all international flows of money over a given period of time

Balance of Payments Cont’d Comprised of: 1. Current-Account balance = trade balance + services balance + transfers 2. Financial (Capital) Account Balance = foreign purchases of home assets – home purchases of foreign assets 3. Official Reserves- the balance of current and financial accounts ***BOP always equals Zero***