Alternate Theories
Classical 1) Chief proponent 2) Stability of the economy 3) What causes instability in the economy 4) Price & wage assumptions 5) Appropriate policies 6) How money supply changes impact the economy 7) How fiscal policy impacts the economy
1) Adam Smith 2) stable in the long-run 3) inappropriate monetary policy 4) wages & prices are fully flexible 5) let the economy self-adjust (leave it alone) 6) changes in the money supply increase price level but do not change output (Only causes inflation) 7) *fiscal policy would only worsen the situation causing more inflation or a deeper recession*
Monetarism 1) Chief proponent 2) Stability of the economy 3) What causes instability in the economy 4) Price & wage assumptions 5) Appropriate policies 6) How money supply changes impact the economy 7) How fiscal policy impacts the economy
1) Milton Friedman & Anna Schwartz 2) stable in the long-run 3) inappropriate monetary policy (money supply) 4) *wages are sticky, but prices are fully flexible* 5) use the monetary rule (MV=P ....? 6) changes in the money supply directly change AD which changes output 7) fiscal policies don't change output unless the money supply changes
Keynesian 1) Chief proponent 2) Stability of the economy 3) What causes instability in the economy 4) Price & wage assumptions 5) Appropriate policies 6) How money supply changes impact the economy 7) How fiscal policy impacts the economy
1) john maynard keynes 2) unstable 3) AS schocks (shifts), AD changes (investment does not equal savings) 4) wages are sticky, prices are downwardly inflexible (sticky) 5) fiscal & monetary policy as needed 6) changes in the money supply *change investment & consumer spending* 7) change in AD that changes output through the multiplier process
Rational Expectations 1) Chief proponent 2) Stability of the economy 3) What causes instability in the economy 4) Price & wage assumptions 5) Appropriate policies 6) How money supply changes impact the economy 7) How fiscal policy impacts the economy
1970's and 80's 1) Robert Lucas 2) stable in the long-run 3) unanticipated AS/AD shocks 4) wages & prices are fully flexible 5) use the monetary rule (MV = ...? 6) there is no effect because price level changes are anticipated 7) there is no effect because price level changes are anticipated