Different School Of Economic Thought

Question 1

Classical Economics

Answer 1

Belief in free markets

Classical economists believe economy is I’ll always return to FE

If left to its own devices

‘Lassiez- faire economic policy’

E.g Adam smith

Question 2

Key Keynesian concepts encomics

Question 3

Keynesian economics

Answer 3

Strong belief in counter cyclical macro policy brining it closer to FE

Liquidity trap makes it difficult to use monetary policy thus requires expansionary fisical policy

This causes issues for budget deficit , national debt and Intergenerational equity gives rise to crowing out

May give rise rise to conflicts between macro objectives

Question 4

Key Keynesian concept

Answer 4

Liquidity trap - limit on effectiveness on Monterey policy

Paradox thrift - excessive saving can lead to further AD reduction

Wages are sticky downwards (preventing labour market from clearing in a recession)

Question 5

Key Keynesian concepts

Answer 5

Reject monetarist - interpretation of quantity theory of money

Multiplier accelerator effect

Question 6

Free market economics

Answer 6

Extension of classical ecnomics

Very little gov intervention belief in free market , privatisation, deregulation

Became more popular as Keynesian models failed to make sense of stagflation of the 1970s

Includes monetarist theories

Become more associate with ‘supply side reform’ (inflation is the biggest issue )

Question 7

Monetarist economics

Answer 7

Milton Fruedmen argued inflation was always cause by an increase in the money supply and govement should seek control on money supply

Key concepts quantity theory of money MV=PQ

And long run Phillips curve

Question 8

Marxian economics

Answer 8

‘Reserve army of labour’

Idea unemployment on large scale will depress wages as plenty workers are willing and able to replace jobs

Low bargaining power will prevent wage - price spiral