Week 4 Flashcards
(6 cards)
Features and beliefs of the ‘Classical’, ‘Neoclassical’ ‘Neoliberal’ School of Macroeconomics?
1) Competition amongst firms. So monopolies and cartels may make the economy less efficient.
2) Consumer sovereignty. Consumers decide what is demanded and produced and consumers are assumed to be rational in their decision making – maximising their utility.
3) Flexible prices and wages- an efficient price mechanism. So this school will be wary of trade union activity and minimum wage legislation.
4) Entrepreneurs and enterprise important: Businessmen and women search out opportunities for profit and so output and employment increase.
5) The rate of interest reflects the supply and demand for loanable funds: More saving would mean a lower rate of interest if demand for loans remained the same. 6) Investment in new plant and machinery is interest elastic. If the rate of interest changes this has an effect on the total of commercial investment.
7) A belief in ‘Say’s Law’ : see below
8) Little involuntary unemployment: There will be frictional and structural unemployment but with flexible prices and wages most people can expect to get a job.
9) Government has a limited role: This school tends to believe that private enterprise is more efficient than public enterprise and so the public sector should be small.
What is Say’s Law of Markets?
All savings are spent, the composition of AD may change but not total. Generally a neoclassical belief. However, Keynesians argue if firms are uncertain about the future then they may not invest all of the savings so AD will be reduced.
‘supply creates it’s own demand’
Features of New Classical Economics?
1) A belief in the market system
2) A belief in rational expectations
3) A belief that markets clear
4) A belief in the natural rate of unemployment
5) A belief that the varying of aggregate demand by government to reduce unemployment is not likely to succeed and is likely to make things worse
6) Monetarism allowed for some possibility that output and unemployment could deviate from the natural rate in the short run. NCM does not believe that this is possible
7) A belief in the need for supply-side policies
The Natural Rate of Unemployment?
The rate of unemployment implied by the present structure of the economy. That rate of unemployment determined by the structural and frictional forces in the economy which cannot be reduced by raising aggregate demand.
The ‘Classical’, ‘Neoclassical’, ‘Neoliberal’ school of thought is made up of three main subgroups: ‘Classical’/‘Neoclassicals’; Monetarists and New Classicals. What do they believe in?
This school believes in free market economics; limited government; privatisation; competition between firms and an efficient price mechanism and believes that if these exist and there is an economic shock these factors plus enterprise will help the economy make a swift recovery
Rational expectations theory?
The application of the principal of rational maximising behaviour to the acquisition and processing of information for the purpose of forming a view about the future.It suggests that individuals do not make systematic forecasting errors; on the contrary that their guesses about the future are on average correct.
Thus the theory suggests that individuals use all the information available and relevant when taking a view about the future
