Economic Shools Of Thought Flashcards Preview

Uni Econ > Economic Shools Of Thought > Flashcards

Flashcards in Economic Shools Of Thought Deck (20):
1

Managing the business cycle

Policy intervention

Objective high and stable growth
Supply side policies
Increasing potential output (LRAS)

Demand side (fiscal and monetary)
Affect aggregate demand
Used to mitigate the effects of economic recessions and booms

2

Market oriented policies

Policies to increase aggregate supply by freeing up the market

E.g.

Reducing government expenditure

Tax cuts
Effects on supply of labour
Effects on demand

Tax cuts for business
Cutting taxes on profits
Greater tax relief for investment

Reducing power of labour (increased flexibility of labour markets)
Reducing welfare payments


Policies to encourage competition
Privatisation
Deregulation
Free trade and capital movements

3

Interventionist supply side policies

Policies to increase aggregate supply by gov intervention to counteract the deficiencies of the market

Types
Funding R&D
Training and education
Information,advice and persuasion
Assistance to small firms
Nationalisation
Direct provision

4

Policy making key questions

1)Labour market
Right wing- keep prices and wages flexible
Left wing allow for price and wage rigidities

2)Should the state try to stimulate AD during recession to promote growth

Right wing can't do
Left wing yes should do

3) how do expectations affect market behaviour
Right wing- expectations adjust rapidly to changes in prices - expansions in AD then should lead to inflationary pressure


Left wing- expectation of prices depends on expectations of output and employment

(What should we do (if anything) to promote high growth, low inflation, low unemployment

And shall we use demand or supply side policies

5

Main schools of thought

Classical economists- free markets clear, no intervention

Keynesian economists- free markets don't clear, intervene!

Monetarist economists- free markets work, any interventions should focus on long run

6

Classical key elements

Price flexibility ensures that D=S
In the labour market and market for loanable funds

Says law - supply creates its own demand

The quantity theory of money


7

Classical on labour and capital markets

Classical analysis on output and employment

Free market works

Markets clear in the long run:
Labour market
-full employment in the LR
-frictional unemployment only

Market for loanable funds

Interest rates will adjust to ensure market clearing
-C(-) > S(+) > (through r ) I(+)

8

Classical on price and inflation

Quantity of money theory

General level of prices depends on money supply
Inflation is then purely a monetary phenomenon

Implications for monetary policy

9

Policy implications of classical

Monetary (at best ) does not work extra money causes inflation m

Fiscal policy (at best) does not work

Gov expenditure must come from extra taxes, extra borrowing, or extra money

Extra taxes and extra borrowing reduce private AD by the same amount

Extra money causes Inflation

10

Keynes on labour markets

They do not clear on their ow

11

Keynes on labour markets

Keynes rejection of classical theory

Markets won't clear

Rigidities in the labour market
The problem of deficiency of demand

Workers are also consumers
When you cut wages you also affect AD
This offsets any benefits and puts the economy deeper into recession

12

Keynes on capital markets

Savings,consumption and animal spirits

Rejection of increased savings as a means of increasing investment

More savings less consumption
Less consumption means less sales for firms

Which deters investment (the paradox of thrift )

S and I are not just tested through r

Behaviour is motivated by perceptions of how others will behave (animal spirits )


13

Keynes on says law

Demand rules!

Keynesians emphasise the role of AD

Says law"supply creates its own demand "


Keynes - no AD can drop and this reduction can cause AS to drop as well (at least for some time )

14

Keynes on inflation

More money does not automatically lead to high inflation

15

Keynes on prices

Classical economists

MV=PY

Hence more M should lead to higher P (inf)

Keynes

Not necessarily

Depends on the position of the AD curve

16

Keynes on policy making

AD too volatile needs to be managed

Remedy - manage AD

FISCAL AND MONETARY TO SMOOTHEN OUT THE BUSINESS CYCLE FLUCTUATIONS

Boost AD in recession
Reduce AD during booms

Also known as stop go policies

Fiscal policy G^ or T(V) > AD ^ -Y^

Monetary M^> G^ or I^ > AD^ - Y^


17

Monetarist economics

Monetarist Keynesian argument

Monetarist counter revolution

Return to old classical theory (nkw extended to stag flation)
Rejection of Keynesian demand management policies

Inflation is always everywhere a monetary phenomenon

The problem of inflationary expectations

A vertical LR phillls curve , the natural rate of unemployment NARU

18

The monetarist punter revolution

Use supply side policies to boost employment

In practice

I'm 70s employment was boosted with AD policies (Keynesian)

Brought about inflation

In 80's thatcher used supply side for employment and inflation was effectively controlled after a while

19

Modern day Keynesian (inflation)

Inflation - not merely a problem of excess demand

Expectations or increasingly rising wages and real living standards which could not be met by a rise in national Income

20

Modern day Keynesian (unemployment)

Why the boom in the 80s was not accompanied by a fall in unemployment

Structural problems
Hysteresis

Low capital stock
Deskilling
Insiders and outsiders