Schools of Economics Notes

Student Note Pages:  Teacher Key

Classical Economics: 1776 to the 1930s, 1980s to the present

Also known as:	1.neoclassical2.supply side
	3.trickle down4.Monetarist
Key historic figures	1.A. Smith       2.J.B. Say
	3. D. Ricardo 4.A. Marshall
	5.F. Hayek      6.M. Friedman
Fundamental Premise of Classical Economics	Competition is Good
Competition will cause businesses to always ____________ products in order to win the market.	improve
Competition will also cause businesses to _________ prices in order to win the market.	lower
This trend is known as the:	Invisible Hand
Consumers will get products that are __________ and __________.	better, cheaper
The inefficient companies will:	leave/disappear
If new companies enter the market, they must be more_________ in order to compete.	efficient
Jean Baptiste Say built on Smith’s analysis and gave us the theory that is known today as:	Say’s Law
If suppliers overproduce, they can correct the surplus by cutting ­­­­­_________ and lowering _________.	production, prices
The economy will re-balance because wages are _________ but so are _______.  Real wealth balances.	lower, prices
If suppliers under-produce, they can correct the shortage by increasing ________ and raising _______.	production, prices
The economy will re-balance because wages are ______ __but so are _________. Real wealth balances.	higher, prices
The summary is often stated as “Supply creates its own ________.”	Demand
Government in this Classical world has a critical role. Government must make sure that _________ occurs.	competition
Government must stop ____________ or _________, which inhibit competition.	monopolies, unions
Classical theorists also want to always lower _______ in order to reduce government interference	taxes
In the Long Run, the Economy will __________ near efficient Full Production.	balance

Keynesian Economics: 1930’s to the present

Also known as:	Neo-Keynesian
Key historic figures:	1.J.M. Keynes2.Krugman
Fundamental Premise of Keynesian Economics	Competition is Good, But Flawed
In the Short Run, Smith’s Invisible Hand will always have the presence of companies that are:	inefficient
Say’s Law is generally a myth because businesses can’t really lower prices at will.  This is known as:	sticky prices
Consumers will also be paid by businesses, but will always __________ some of the income.	save
This will cause a constant __________ of wealth.	leakage/loss
Because of these problems, businesses will be under constant pressure to _______  jobs and production.	cut
Prices can also increase easily, but not decrease.  This is known as the ___________ Effect.	Ratchet
Markets can reach efficiency and full employment, but Keynesians assume that they will soon become:	inefficient/recessions
­­­­­_______________ will probably become the economic norm.	recessions
Government must now step in and correct the missing ________  ___________.	Aggregate Demand
Congress will represent the interests of the people best and will therefore use the tools of _____ and _______.	taxes and spending
Congress can’t wait for the potential Long Run Balance, because ___________ need help.	workers/citizens
Keynes summarized this as “In the Long Run we are all __________”	dead
When recessions occur, Congress should ______ taxes, _________ government spending.	cut, raise
When inflation occurs, Congress should _______ taxes, _________ government spending.	increase, cut
Congress can also create programs that keep the economy from crashing so much.  These are known as:	automatic stabilizers
Examples of these programs are:	Unemployment Insurance, Social Security

Monetary School Economics: (1913), 1970s to the present

Also known as:	1.Federal Reserve Policy
	2.Central Bank Policy
Current US Chairman of the system:	Ben Bernanke
Fundamental Premise of the Monetary School	Competition is Good, but needs Fine Tuning.
The average recession in the US will last about:	14 months
We only “know” a recession has started after at least _________ months have passed.	6 or more
Even if Congress agrees on a policy, it can take many more __________ to enact.	months
By the time the policy comes into force, the recession may have already:	ended naturally
Congress may be able to cut taxes during recessions, but they will never have the will to ________ taxes to fight inflation.	raise
Therefore, the best way to correct economic flaws is to have the ________ ________ act quickly.	Federal Reserve
In addition, this group can focus on stable __________ that helps control demand pull inflation.	prices
The group can always also focus on long run growth with realistic growth __________.	targets (2 to 3%)
This means that the government, through this non-political and independent agency can control national growth by manipulating __________ _______.	interest rates/money supply
This will keep _____ under control and healthy for businesses and other borrowers.	inflation
When recessions threaten, ________ interest rates on borrowing.	lower
When inflation threatens, _________ interest rates on borrowing.	raise