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

2. 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

3. 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

4. Classical Economics Classical Theory AS P1 Price Level P2 AD1 AD2 Qfb P1
Price Level c P2
AD1
AD2 Qf
Real Domestic Output

5. 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

6. 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

7. Keynesian Economics Keynesian Theory AS Price Level P1 AD1 AD2 Qu Qfx
Price Level P1
AD1
AD2 Qu Qf
Real Domestic Output

8. 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

9. 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

10. 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)

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

12. 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***