Classical
- Modern Followers: Adam Smith, John B. Say ,David Ricardo, and Alfred Marshal
- Say's Law: supply creates its own demand, production = income = spending, under spending us unlikely, whatever output produced will be demanded
- Savings (leakage) equals investment (injections)
- prices and wages are flexible downward
- supply curve is vertical
- Aggregate supply determines output and employment
- Unemployment rarely exists due to wage/price flexibility
- Aggregate demand determines price level and is usually stable
- Basic Equation: MV = PQ
- Role of Government: monetary rule, maintain money
- Laissez faire is best
- Economy is self regulating
- Inflation is caused by too much money
- The short run is actually short
Keynesian
- Modern followers: J.M. Keynes
- Say's Law: depressions refute Say's law, demand creates own supply, under spending persists
- Savings does not equal investments; different motivations
- Prices and wages are inflexible downward ; known as Ratchet Effect
- Supply curve is horizontal
- Aggregate demand determines output and employment
- Unemployment usually exists
- Aggregate demand changes due to determinants and is usually unstable
- Basic Equation: C + Ig + G + Xn = GDP
- Role of government: fiscal policy is tax and spend, believe in active government, economy is not self regulating
- Inflation caused by too much demand
- Short run is actually long
In the keynesian side, leaks and savings cause recessions. In the classical side, economy is always close to or at full employment.
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