1. Fiscal and Monetary Policy
Macroeconomics
Fiscal and Monetary Policy
Purpose: Classify economic thinkers based upon beliefs.

2. I. Goals
Explain the differences between Classical and Keynesian economic theory and how each developed.
Illustrate how Classical and Keynesian theory operates through a simple circular flow diagram.
Explain the development of neo-classical schools and new Keynesian theory.

3. II. Classical vs. Keynesian Economic Theory
Laissez- faire/ non-activists
Say’s Law – “Supply creates its own demand.”
Dominant school of economic thought until the Great Depression.
Keynesian
Government intervention needed/ activists
John Maynard Keyes– “Demand creates supply.”
Emerged in the 1930’s and remains fairly prominent.

4. III. Other Economic Schools
Monetarism
Fiscal policy should not be used to remedy recessions
FED should maintain long-run growth plan with the money supply.
Supply-Side Economics (Reaganomics)
Return to a more classical outlook on Macroeconomic theory.
Economic growth will be most effective when investing in capital and lowering production costs.
The Chicago School
Neoclassical school of thought, attributed with the University of Chicago.
Based on the theory of rational expectations.
Stemmed from the Austrian School.