Macroeconomics Slideshow

source: http://www.slideshare.net/MrRed/chapter-19-classical-vs-keynesian

Notes

Slide 1

Classicals, also known as Austrian school.  Advocates a pure free market system.  All government ("G") interference is bad.  (Out of consideration even)

Keynesianism, started in 1930's (great depression seen as a failure of classical economics), advocates using Government spending and Taxation to smooth market fluctuations.  Using many of its tactics since Nixon.

Monetarists, also known as Chicago School, is a partial return to classical principles.  1970's stagflation seen as a failure of Keynesianism.

Mainstreamers incorporate principles from all these schools.

Slide 5

Don't really assume a vertical supply curve.  That says, "the same amount of good are available at all prices."  Example: Mickey Mantle rookie baseball cards, because they cannot be produced any more.

Full employment means wages are easily lowered until there are enough (possibly poverty-level) jobs for all.

Say's Law: "products are paid for with products" (can ignore intermediate money/product transactions)
and "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another." (but the free market should automatically adjust)
In Say's view, a rational businessman will never hoard money; he will promptly spend any money he gets "for the value of money is also perishable." (or unproductive at least)
"it is not the abundance of money but the abundance of other products in general that facilitates sales"

Modern version: "Supply creates its own demand"

Slide 6

Vertical supply curve is typical of a Keynesian explaining classical economics.

Slide 10

In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.  The phrase laissez-faire is French and means "leave it alone."  (Without regulations, how do you know they are respecting free market principles?)

AD = Aggregate Demand, AS = Aggregate Supply

Downwardly Inflexible means people and companies don't want to give up their high wages and prices.  (In classical economics, for prices to go down, other people have to come to take their jobs, and other companies have to undersell them.)

Slide 12

Keynesian view shows unemployment instead of decreased wages, which is exactly what a classical economist says results from minimum wages, whether imposed by government or unions.  (But the classical economist simply says "that's bad" and doesn't try to figure out any other way to fix it.)

Slide 14

Keynesian solution: (more) government intervention
The government should increase spending to make up for lack of private spending/investment.  Go into debt in times of recession and pay it off in times of boom.

Slide 16

MV = PQ

M = Money Supply, V = Velocity (rate of exchange of money/goods), P = Prices, Q = Quantity

Hence, more money causes rising prices (inflation).

Slide 18

Stable Velocity assumption

Slide 19

(see also slide 26)

Why?  When some prices go up, others must fall.  The goal is a stable economy without price drops.  So instead of falling, "losers" can maintain a constant price, while "winners" go up (even more).  This avoids all the messiness (see above) required in order for prices and wages to actually fall in the free market.

3-5% is also the long-term inflation rate.  Coincidence?

Slide 20

Rational thinking defeats all economic policies.

e.g.  Employees demand yearly 3-5% "cost-of-living" raise just keep up with inflation.

Slide 22

Interest Rate and Money Supply are the tools the Fed uses to regulate the economy.

Slide 23

C + I + X + G = GDP

C = Consumption (aggregate household spending), I = Investment (i.e. business spending), X_n = Exports (net: Exports - Imports), G = Government Spending, GDP = Gross Domestic Product (Aggregate Demand)

Therefore Government Spending is a big factor in the equation.

Slide 24

Macro-Instability means booms and busts.

Investment = Business spending. Mainstream blames business, expects government to provide solution via Fed.

Monetarist...  (assumes stability??)

Slide 26

rise in GDP implies rise in quantity.  Assuming vertical supply, implies drop in prices.  But prices and wages are downwardly inflexible, creating instability.

Slide 27

increase money supply at same rate of rise in GDP --> (hopefully) stable prices