Keynesian Economic Theory

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Economics is the study of how resources are distributed throughout an economy, and how to create stability and growth throughout the economy. Like today, history was filled with the debate of government involvement, fiscal policies, and how to run the economy. Classical, Keynesian, and Monetarist Economic Theories are no different, they take their own approach when dealing with fiscal policy, government involvement, and consumer spending, to reach the same goal of creating the most successful economy. The Classical Economic Theory, became a mainstream idea around, 1776 and continued to be a widely accepted idea until around the 1930’s. Classical Economist use Say’s Law as the base principle. Say’s Law is the law of the market and is used…show more content…
Many know The Great Depression hit America at this time, leaving more Americans without money, however the supply had not changed, there was still the same technology and resources and it was clear to Keynesian Economic that a self adjusting economy would not cut it anymore. This theory is the idea that demand determines the amount goods supplied. The Keynesian Economists believed aggregate demand is influenced by both the public and private sectors; meaning they believed the government had a role in the influence of economic choices. The belief that the velocity was unstable and that the market would not return to potential output on its own was a large argument they had. As aggregate demand affects the supply (production, employment and inflation) they saw it as the government's role to build it back up using monetary and fiscal policies. Similar to Classical economists, Keynesian believe the economy comprises the same part: consumer spending, government spending, and business investments. However the major difference is that Keynesians believed government spending could help account for the lack of consumer spending and investment. The Keynesian theory also was based on the idea that wages and prices were sticky and that is would give aggregate supply a horizontal line in the short run. Overall, the main idea of the Keynesian Economist was to save and create jobs and…show more content…
This economic school of thought focuses on the money supply in determining the price level and nominal GDP and therefore determining the overall growth of the economy. The founder of this theory is Milton Fremon who disagreed with Keynesian beliefs. Their basic theory was based on a mixture of theoretical ideas, policies, and philosophical beliefs. Most important part of this economic thought is The Quantity Theory of Money, the equation used for exchange (MV=PY). This theory was unpopular with most Keynesian because of their belief that velocity was unstable and the economy would not return to potential output without help. However, the Monetarism theory relies on the ability to predict the velocity rather than stabilize it. Because Monetarists believed the economy was stable, they viewed the Aggregate supply curve as a steep slope. Another idea Monetarists believed was that the Fed should have a strict set of rules, which they should tie in monetary policies, including one of the most popular: the Money Growth Rule. The Money Growth Rule stated “The Feds should be required to target the growth rate of money so it equals the growth rate of real GDP.” However, Monetarists saw fiscal policy as useless, and believed government should not intervene, because the only thing that comes out of government intervention is interference with the free market.
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