Class Notes (839,315)
United States (325,922)
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ECON 0110 (84)

Section 3 Notes.doc

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ECON 0110

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SECTION 3: CLASSICAL ECONOMIC THEORY AND DIFFERENT ECONOMIC SYSTEMSCLASSICAL ECONOMIC THEORY CLASSICAL THEORY Natural tendency to move toward full employment No need for fiscal or monetary policy CLASSICAL REASONING Unemployed workers compete against each other Wage rates will decline Lower wages lead to increased profits Increased profits lead to increased employment Full employment will be restored KEYNESIAN ECONOMIC THEORY John Maynard Keynes The General Theory Of Employment, Interest And Money, 1936. th Most famous economist of the 20 century. Argued that there is no automatic tendency for the economy to move toward full employment KEYNESIAN THEORY Unemployment is caused by a lack of sufficient aggregate demand Producers adjust output to satisfy the desires of customers If demand is low, output will be low KEYNESIAN POLICY RECOMMENDATION When aggregate demand is low, government should try to boost aggregate demand KEYNESIAN FISCAL POLICY Other things being equal, an increase in government spending will stimulate the economy Other things being equal, a tax cut will stimulate the economy QUESTIONS THAT NEED TO BE ANSWERED BY ANY ECONOMIC SYSTEM WHAT types of goods will be produced? Consumption goods Investment goods Government goods HOW MUCH will be produced? WHO will get the output? HOW will the output be allocated? DIFFERENT ECONOMIC SYSTEMS: BARTER ECONOMY I exchange my goods or services for your goods or services Exchange requires a double coincidence of wants Inefficient LAISSEZ FAIRE ECONOMY Minimal government interference in the economy COMMAND, OR PLANNED, ECONOMY The central government owns many of the factors of production Examples: government might own the railroads, the oil fields, the iron mines, the banks, the hospitals, the schools, etc. Government planners often decide what will be produced and who gets the output Examples: The Soviet Union had “five Year Plans” whereby the central government decided how much agricultural output would be produced. The governments of the OPEC oil countries decided how much oil would be produced and exported to the rest of the world. CAPITALISM: Emphasis on the free market system Producers and consumers are free to make their own choices CHARACTERISTICS OF CAPITALISM PRIVATE OWNERSHIP of property and means of production PROFIT MOTIVE gives producers incentive to produce what people want PRICES are free to move up and down and pro
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