3. Vocab to Know Fiscal policy Monetary Policy The Fed John Maynard Keynes Interest Rate Deficit Recession Depression Adam Smith Marshal
4. Three competing economic philosophies Classical Economics Keynesian Economics Supply Side Economics (Reaganomics)
5. Classical System, Adam Smith: “Wealth of Nations” 1776 Government had no role in management of the economy – “Laissez-faire” or “do nothing” Law of Supply and Demand takes care of economy The economy regulates itself. In the long run, the economy will always balance itself out
6. Classical Econ Classical Econ theory When prices rise we buy less (demand goes down) surpluses prices dropwe buy more prices going up When we buy less, businesses lay off workers – less people with jobs – less buying – recession or depression. Eventually, businesses drop prices to point where people buy stuff – businesses make $ - businesses hire more workers – workers spend $ - Depression over All Self Regulating without any need for government interference
7. Keynesian Economics: “Demand Side Economics” John Maynard Keynes (early 1900s) Economies are unstable and always changing Inflation caused by DEMAND – Too many $ trying to buy too few goods Economies will NOT balance themselves out in a timely manner Too many people will get hurt waiting for the economy to adjust to imbalance in Supply & Demand Government must step in to correct the inherent instability of the economy “In the long run, we’re all dead” J M Keynes
8. Fiscal Policy (Keynes view) In a recession (not enough spending) Government must increase demand by spending more; lowering taxes; lowering interest rates; increasing welfare Examples: FDR’s New Deal programs, Bush/Obama’s “Stimulus Package” “Deficit Spending” is good When in debt, govt should SPEND money and tax less to get out of debt Explain how this works.
9. Supply Side Economics (Reaganomics) Believes inflation caused by lack of supply Tax less, Regulate less ANDcut Government Spending “Trickle Down Economics” Put more $ in hands of the producers They will make more stuff and hire more workers Workers will spend more money and buy more stuff etc etc E.g. Ronald Reagan in 1980s (“Reaganomics”)