Keynes
Top down approach
Government can solve economic issues
They can steer markets toward desired outcomes
Animal spirits- self preservation
Hayek
How does the government know what to do?
Let *prices work
Let people make free decisions and the individual
actions will result in a spontaneous order (sort of
like Smith’s invisible hand)
* Prices include : Prices, wages, and interest rates
Recessions are natural but government action
makes them worse than they would naturally be.
PL
AS 1
C+G+I=Y
Boost C by lowering taxes
Boost G by increasing spending
AD 2
AD 1
Full
Y
Real GDP
Employment (Y)
Boost I by lowering interest rates
2 types of stimulus
Government spending
Lowering taxes
Of the 2 Keynesians prefer
increasing spending
According to Keynes Savings slows growth because consumption is down
We cannot Rely on the individual to spend
We need the government to spend
Monetary policy deals with Interest rates and money supply
Controlled by the Federal Reserve
Fiscal Policy – spending and tax – Congress
Spending is more important than even valued production –
spending’s impact multiplies as more people use the money
If Fed. Reserve increases money supply and people still don’t spend
then monetary policy still won’t work. The best solution is deficit
spending. Government spends more than they bring in.
Difficult to increase taxes, cut programs, and increase interest rates
We all get use to these comfortable policies.
Prices convey realties and value
People won’t be motivated to keep their jobs and be efficient
Government spending isn’t free.
Government decides who gets the bailouts and where the
spending goes- leads to cronyism and quid pro quo
Savings leads to production- because when we save more there
will be an increase in loanable funds, this leads to lower interest
rates. We save for future consumption. Business expand to
produce products in the future.
PL
AS 1
AD 3
AD 2
AD 1
Real
gdp
Full
Y
Growth
Full employment
Real GDP
Y
PL
AD 3
AD 2
AD 1
time
Full
Y
Real GDP
Y
$
If prices were real than people would be more careful
With their decisions
$
Use the money market
Rent-seeking
Companies more concerned with getting “government”
money than producing items that we value