Three schools of economics

Classical:

 Adam smith

 john b say

David Riccardo

 Alfred Marshall

Keynesian:

John Maynard Keyne

Congress,

Monetary school:

Allen greenspan,

ben Bernake

Classical School:

Competition is good

 Invisible hand (market runs itself)

Liaises fare

 Say’s law: supply creates its own demand (whatever output is produced creates its own demand

Economy is always close to or at full employment

 Trickle-down effect: help rich then everyone else

Savings is a leakage

Investing is an injection

Savings increase with the interest rate

Prices and wages are flexible downwards

In the long run the economy will balance out at full employment

They focus on AS: it determines output

AS=AD at full equilibrium

Keynesian School

Competition is flawed.

AD is the key, not AS

Demand creates its own supply

AD determines output

Savings doesn’t = investment

Savings are inverse to interest rates

Leaks causes constant recessions

Savings cause recessions

Ratchet effects and sticky wages block Say’s Law

Since there is no guarantee for full employment, in the long run we are dead

The economy is not always close to or at full employment

Will use fiscal policy

Will add stabilizers

Will use expansionary and contractionary policies

Monetary School

Congress can’t time the policy options

Voters won’t allow contractionary options

Easy money, tight money

We can change the required reserves if needed

We can buy and sell bonds through open market operations

We can use the interest rate to change the discount rate and the federal fund rate