Unit 3: Notes and Need-To-Knows 2.19.15

Three Schools of Economics

Classical:
Adam Smith: "Invisible hand"; market will function by itself

Laissez Faire: Little to no government in the market
John B. Say: Say's law claims that supply creates its own demand

Competition is good
Trickle down effect: Help the rich and their prosperity will "trickle" down to everyone else later.

The economy is always close to or is at full employment.
AS = AD at full employment equilibrium.
In the long run the economy will balance at full employment.
AS determines output
Savings is a leakage

Investment is an injection
Savings increase with interest rates
Prices and wages are flexible downwards.

Keynesian:

There is government hand within the market and people

John Maynard Keynes: Competition is flawed ; AD is key, not AS. 

Demand creates its own supply

They use expansionary and contractionary fiscal policy.
The economy is not always close to or at full employment.
Leaks cost constant recessions.
Savers and Investors have their own different reasons
Savings are inverse to the interest rate.
Prices and wages are inflexible downward.

In the long run we are all dead because we cannot determine full employment
Add stabilizers in the economy

Monetary:
Allen Greenspan
Ben Bernanke
Fine tuning is needed
Voters wont allow contractionary options.

Implements easy money, tight money 

Congress cant time policy action

They change required reserves when they need to .
Buy and sell bonds through open market operations.

They use interest rates to change the discount rates and the federal fund rate