Unit Three: Classical AS

Classical vs. Keynesian

Notes from 2/24/16

CLASSICAL

- Followers:

       + Adam Smith

       + J. B. Say

       + David Ricardo

       + Alfred Marshall

-Say's Law:

       + Supply creates its own demand

       + Production = Income = Spending

       +Underspending is unlikely

-Savings and Investments:

       +Saving s= Investment Income

       +Savings (Leakage) = Investment (Injection)

-Loanable Funds Market:

       

-Wage/Price Flexibility:

        +Prices and wages are flexible downward

-Supply Curve

        +VERTICAL

-Output and Employment

        +AS determines output and employment

-Unemployment:

        +Rarely exists due to wage/price flexibility 

        +Causes: External - War 

- Aggregate Demand

       +AD determines price level

       +AD is reasonably stable if supply of money is stable

-Basic Equation

       +mv = PQ (from 1965-1972)

 -Role of Government

       +Monetary Rule

       +Maintain a steady Supply of Money (Sm)

       +Believes laissez-faire is best

       +Believes economy is self-regulating

-Inflation

       +Caused by too much money

-How long the short run is?

       +A short time

-Emphasis Today:

       +Microeconomics

EXTRA THINGS

*Competiton is good!

*Believe in the invisible hand (Government regulates itself)

*In the long run, economy will balance at full employment

*Economy is always close to or at full employment

*Believe in the "trickle down effect" (Rich served first, everyone else second)

-JaelyNoTainted

Like Jaelyn (SPACE) Not (SPACE) Tainted

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