February 19, 2015
Three schools of economy ( Classical, Keynesian, Monetary)
Points of Classical school
- Investment (Injection)
- AS determines output
- Market works by it self (No government intervention)
- Savings increase with interest rate
- AS=AD at full employment equilibrium
- In the LR the economy will balance at full employment (economy close to or at full employment)
- Believe in the trickle down effect ( this is were you help the rich first and everyone else latter)
- Prices and wages are flexible downward
Points of Keynesian school
- Competition is flawed (AD is key not AS)
- Demand creates its own supply
- Savers and investors save for different reasons
- Saving are inverse to interest rate
- Leaks cost constant recessions and savings cause recessions
- Ratchet effects and sticky wages block state law
- Price/wages are inflexible downward
- No mechanism capable of guaranteeing full employment
- The economy is not close to or at full employment
- Government intervention (expansionary & contractionary policies (Fiscal policy)
Points of Monetary school
- Fine tuning is needed, congress can't time the policy options (voters wont allow it)
- Contractionary option
- Easy and tight money
- Change the required reserves if needed
- Buy & sell bonds in open market
- Change in interest rate for the discount rate & federal fund rate
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