Download presentation
Presentation is loading. Please wait.
1
Macroeconomic Theories
Classical vs. Keynesian Economics
2
Reading Read Keynesian Handout
3
CLASSICAL Economists Markets are naturally self regulating
Classical economists were the 1st school of economic thought starting in 1776 Adam Smith was the founder and they believed: Markets are naturally self regulating No government intervention necessary Recessions are temporary Great Depression challenged Classical View
4
KEYNESIAN VIEW Economy is inherently unstable
not self regulating Recessions can be long & permanent Major government intervention necessary Became popular after Great Depression (think FDR) Support welfare and government assistance Stagflation challenged Keynesian view John Keynes: Founder of Keynesian Economics
5
Economic Schools of Thought
NeoClassical Economics | | Classical Economics | | Keynesian Economics | | Great Depression? Prices were not flexible! What Now? Housing Bubble Now What? Keynesian Economics did not help here!
6
How to Fix U.S. Economy? USA Economy --------- -------- Price Level P1
LRAS1 Price Level Real GDP SRAS1 AD1 P1 Y1 E1
7
Let Prices & Wages Adjust? (60 minutes video: Buy American)
Free Trade Protectionist => policies to reduce trade
8
Keynesian vs. Classicial
AS/AD Model “Keynesian Gov’t Intervention AS/AD Model “Classical Self Regulation” LRAS1 Price Level Real GDP SRAS1 LRAS1 Price Level Real GDP SRAS1 SRAS2 AD1 AD1 P1 Y1 E1 AD2 P1 Y1 E1 End Result: Same Real GDP & Employment Keynesian leads to more debt & higher price level
9
End Day 1
10
Theory – Period Challenged
Classical Theory Great Depression (1929) Keynesian Economics- Stagflation (late 1970’s) Neo-Classical Theory Great Recession (2008)
11
Economy is too slow =>
Review: Classical vs. Keynesian “Do Nothing=> let prices adjust” or Economy is too slow => Help now! => use expansionary Fiscal Policy
12
Keynesian vs. Classical
Keynesian economists felt recessions could be long/permanent More AD was needed to “fix” economy => so cut taxes & ↑ Gov’t Spending Classical economists felt recessions would “self regulate” because prices would fall which would lead to more jobs SRAS shifts right whenever prices adjust lower
13
Worksheet #2
14
Keynesian vs. Classicial
“Keynesian Gov’t Intervention “Classical Self Regulation” LRAS1 Price Level Real GDP SRAS1 LRAS1 Price Level Real GDP SRAS1 SRAS2 AD1 AD1 P2 E2 P1 Y1 E1 AD2 P1 Y1 E1 P2 Y2 Y2 End Result: Same Real GDP & Employment Keynesian leads to more debt & higher price level
16
Supply & Demand Free Response
Computers
17
Economists often Disagree
Are tax cuts good or bad? Do Large Deficits always raise interest rates? Will taxing “rich” people significantly lower GDP? The answer to most economic questions is: IT DEPENDS!
Similar presentations
