3 schools

3 schools 

Classical

 Adam Smith, David Ricardo, Affret Marshal 

Competition is good 

Supply creates its own demand 

What ever output is produce it will be demanded.

AS determines output 

Invisible hand- market functions by it self. "Laissez-faire"

Saving( Leakage)= investment (injection) 

Saving increase with the interest rate. 

AS= AD @ full employment equilibrium 

Long run,  economy will balance @full employment.

Economy, always close to or at full employment 

Believe in trickle down effect.

Prices and wages are flexible downward. 

Keynesian

John Maynard

Competition is flawed, AD is key and not AS

AD determines output, there for demand creates its own supply.

Savers and investors, save and invest for different reasons.

Saving are inverse to interest rates.

Leaks cause consent recession, also saving causes recession.

Ratchet effects , and sticky wages blocks "says law"

Prices/ wages are inflexible downwards 

There is no mechanism capable of guaranteeing full employment.

In the long run we are dead.

The economy is not close to or at full employment 

Some government intervention 

Add stabilizers, use expansionary and contractionary policy. We use fiscal  

Monetary

Allan Greenspan, Ben benanke 

Fine tuning is needed

Congress can't time policy options

Voters won't allow contractionary options 

We use easy and tight money

Change required reserves if needed 

Buy and sell bonds on the open market.

Change the interest rates for the discount rates and federal fund