Unit 3 School of Economics notes

Three schools of economics
Classical	Keynesian	Monetary
·         Adam Smith, John B Say, David Ricardo, and Alfred Marshall  ·         Competition is good ·         Invisible hand- the market runs itself ·         Fosters in laissez-faire ·         Market function by itself ·         Say’s law: supply creates its own demand. Whatever output is produced is what will be demanded. ·         The economy is always close to or at full employment ·         In the long run the economy will balance out at full employment ·         Trickle-down effect: help the rich first then everybody else. ·         Savings (leakage) = investment (injection) ·         Savings increase with interest rate. ·         Prices and wages are flexible downward. ·         AS determines output ·         AS = AD at full equilibrium	·         John Maynard Keynes, Congress ·         Competition is flawed ·         AD is the key not AS ·         Demand creates its own supply ·         AD determines output ·         Savers does not equal investment ·         Savings are inverse to interest rates ·         Leaks causes constant recessions ·         Savings also cause recessions ·         Ratchet effects and sticky wages block Say’s law. ·         Since there is no mechanism for guaranteeing full employment, in the long run we are dead. ·         The economy is not always close to or at full employment ·         Will use fiscal policy ·         Will add stabilizers ·         Will use expansionary and contractionary policies	·         Allen Greenspan, Ben Bernanke ·         Congress can’t time the policy options ·         Voters won’t allow contractionary options ·         Easy money/ Tight money ·         Can change required reserves if needed ·         Buy or sell bonds through open market operations ·         We can use the interest rate to change the discount rate and the federal fund rate