1. Today’s Agenda
Mercantilism is Dead The Birth of Classical Economics The Invisible Hand Keynes’s Prescription for Depression The Battle for Economic Supremacy! Can You Spot The Economist?

2. Review: Mercantilism
Mercantilism was the dominant economic system during the period of the ’s

3. Review: Mercantilism Country’s wealth came from gold and silver
Maximize wealth through:
- Government regulated trade
- Favorable balance of trade
More exports
Fewer imports

4. Review: Mercantilism MOTHER COUNTRY
Colony sent raw materials to Mother Country
Colony
MOTHER
COUNTRY
Mother Country sold finished goods back to Colonies
Colonies were not allowed to trade with each other

5. Smith vs. Keynes: The Battle for Economic Supremacy
Adam Smith 1776
John Maynard Keynes 1936 VS

6. Let’s Investigate Form 4 Groups Groups 1 & 2: Adam Smith
Groups 3 & 4: John Maynard Keynes
Fill out your Note Sheet as you go
Use the Word Wall to help with terms

7. Reading Strategies & Word Wall
Reading Strategies to Try:
1. Underline any sentences that you think answer prompts on your Note Sheet.
2. Circle any words whose meaning you can’t figure out by reading the words around it.
Tariff - A tax paid on an import or an export to control trade
Multiplier – The factor by which gains in total output are greater than the change in
spending that caused it. (e.g. Investing $100, can stimulate economic growth of $500)
Countercyclical Policy - Increase spending when economy is down and vice-versa
Deficit Spending – Budgetary spending that exceeds revenues (income)

8. Smith: the Father Wrote “Wealth of Nations” in 1776
End of Mercantilism
Advocated for Laissez-Faire system of government
Belief in the “Invisible Hand”

9. Keynes: The (Prodigal) Son
Active during the 1920s and 1930s
Advocated for active government intervention in the economy
Countercyclical monetary policy
Economies that run on debt
Economic growth is growth in GDP

10. Application Today How Do We See Smith’s Influence Today?
How Do We See Keynes’s Influence Today?
Classical or “monetarist” policy
Austerity: raise taxes, reduce government spending to reduce deficits
Austerity is common in Europe, but not popular
Deficit hawks hate Keynes
Countercyclical: reduce government spending during growth, increase during recession
Tendency to create or increase government debt
Usually includes “stimulus”
Great Recession bail-outs and government lending and purchasing

11. Check For Learning
For each example, determine if the action is classical or Keynesian.
In 2009, Greece closes down its state-owned television stations to try to reduce government spending.
The government of France buys 20,000 wheels of French cheese in a bid to prop up the stinky cheese industry during a downturn.

12. Check For Learning
The United States Congress passes tax cuts that leave an extra $500 in each taxpayer’s pocket during a recession.
Wisconsin raises sales tax to 14% and cuts all funding for public schools to balance the budget.
The Federal Reserve sells an extra $30 billion worth of bonds during a period of sustained economic growth.

13. Questions?