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Economic Ideologies

Economic Ideologies. AREAS OF DISPUTE. WHAT CAUSES INSTABILITY IN THE ECONOMY? IS THE ECONOMY SELF-CORRECTING? SHOULD GOV’T HAVE RULES OR USE DISCRETION IN SETTING ECON POLICY?. Classical Economics. Origin : Adam Smith Wealth of Nations

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Economic Ideologies

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  1. Economic Ideologies

  2. AREAS OF DISPUTE • WHAT CAUSES INSTABILITY IN THE ECONOMY? • IS THE ECONOMY SELF-CORRECTING? • SHOULD GOV’T HAVE RULES OR USE DISCRETION IN SETTING ECON POLICY?

  3. Classical Economics Origin: Adam Smith Wealth of Nations Proponents: Mills & Says Law (supply creates its own demand) Key Equation: Savings=Investment • First modern school of economic thought • Also known as Conservative Economics • Prefers free market solutions to fix economic problems • Economy is self regulating in the long run

  4. Classical Economics cont’d • Prices, wages and interest are (or should be) flexible • Capitalism promotes economic growth, innovation, efficiency and raises standards of living • Government is bad=Laissez faire • Natural laws of economics • Freedom of trade • Short term problems fix themselves in the long run • Say’s law- supply creates its own demand • Outside shocks cause economic inefficiencies

  5. Keynesian Economics Origin: John Maynard Keynes Key Graph: AE • Otherwise known as Liberal Economics • Free markets do not solve high unemployment • Instability is inherent in capitalism • Demand for goods is central for understanding the rise or fall of production • Economy can remain stuck in recession or depression • Government is Good= can ‘fix’ capitalism

  6. MONETARISM Origin: Milton Friedman Main equationmv=pq; velocity is stable • Economy is stable in LR at natural rate of unemployment • Promote steady growth • Fiscal policy has no affect • MP should focus on price stability • Instability of economy is caused by incorrect mp • Full employment reached if government is not involved • Expand money supply each year at the same annual growth rate of GDP • **CONSTITUTIONAL AMENDMENT FOR A BALANCED BUDGET???

  7. RATIONAL EXPECTIONS Origin: Robert Lucas • Prices adjust instantly • People act in response to expectations... They are ‘rational’ • Recessions self correcting • Inflation is always anticipated • Self correction • Lower prices don’t change real output even in the SR

  8. Supply Side Origin (proponents): Ronald Regan George Gilder Main equation: Laffer Curve (relation between tax rate and revenue) • Free-trade crucial to success of supply-side • Production most important determinant of economic growth • MP goal to reach a specific value of money • LR growth is achieved by cutting marginal taxes • Cut taxes for investors/ \entrepreneurs and it will “trickle down” throughout economy • Coined “Voodoo Economics” by George H.W. Bush

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