1. Macro Theories Keynesian Classical
Lesson8
Macro Theories
Keynesian
Classical

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

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

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

5. 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,

6. 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

7. (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

8. Quantitative Easing

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

10. Why Devaluation
Increasing net imports = more imports than exports…

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

12. 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

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

14. Fiscal Policy
Tax avoidance
Tax evasion

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