Schools of Economic Thought

what the OTHERS believe
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Monetarists - 1940's
- Output is determined by the supply of money in the economy.

- You should follow a strict set of rules when adjusting the economy and focus on long-term growth.

- Only MONETARY policies should be used to stimulate the economy.
New Classical Economists - 1970's
- Wages were NOT sticky because of COLA's. (Cost of living adjustments)
- Workers form "rational expectations" about the economy.
- Only MONETARY policy should be used.
Rational Expectations
Concept used by NEW CLASSICAL economists. Is a belief that planned actions taken to fix the economy will have little impact because citizens will adjust their habits to them.
Classical Economists - 18th & 19th Centuries
- Supply creates its own demand.
- Government should stay out of the economy.
- Wages were completely flexible.
- Only MONETARY policies should be used and adjustments to the money supply will impact prices.
Supply-Side Economists - 1970's & 80's
- Focus should be on Aggregate Supply not Aggregate Demand
- By lowering taxes and reducing regulations, business profits will increase leading to greater investment.
- Stimulate AS first and AD will follow.
Say's Law
Concept used by CLASSICAL economists to describe output. It is a belief that supply creates its own demand.
- Increasing output will employ more workers and lead to greater spending.
Velocity of Money
How fast is money spent in the economy?
Keynesian Economics - 1930's & 1940's
- Focus should be on Aggregate Demand.
- Contracts made wages sticky.
- Should use a combination of TIGHT Fiscal and EASY Monetary policy.
- You can should focus on short-run to deal with negative shocks or positive advances in the economy.
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