Previously, classical economic thinking held that cyclical swings in employment and economic output would be modest and self-adjusting. According to this classical theory, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages.
Briefly summarize the new classical school of thought that emerged in the s, and discuss how the experiences of the s seemed to be broadly consistent with it.
Summarize the lessons that economists learned from the decade of the s. The experience of the Great Depression led to the widespread acceptance of Keynesian ideas among economists, but its acceptance as a basis for economic policy was slower.
The administrations of Presidents Roosevelt, Truman, and Eisenhower rejected the notion that fiscal policy could or should be used to manipulate real GDP. Truman vetoed a Republican-sponsored tax cut aimed at stimulating the economy after World War II Congress, however, overrode the vetoand Eisenhower resisted stimulative measures to deal with the recessions of, and It was the administration of President John F.
Kennedy that first used fiscal policy with the intent of manipulating aggregate demand to move the economy toward its potential output. Expansionary Policy in the s We can think of the macroeconomic history of the s as encompassing two distinct phases.
The first showed the power of Keynesian policies to correct economic difficulties. The second showed the power of these same policies to create them. Correcting a Recessionary Gap President Kennedy took office in with the economy in a recessionary gap.
He had appointed a team of economic advisers who believed in Keynesian economics, and they advocated an activist approach to fiscal policy.
The new president was quick to act on their advice. Kennedy argued that the United States had fallen behind the Soviet Union, its avowed enemy, in military preparedness. He won approval from Congress for sharp increases in defense spending in The Kennedy administration also added accelerated depreciation to the tax code.
Under the measure, firms could deduct depreciation expenses more quickly, reducing their taxable profits—and thus their taxes—early in the life of a capital asset. The measure encouraged investment. The combination of increased defense spending and tax measures to stimulate investment provided a quick boost to aggregate demand.
It, too, shifted to an expansionary policy in The Fed purchased government bonds to increase the money supply and reduce interest rates. As shown in Panel a of Figure The actual unemployment rate in was 5.
The short-run aggregate supply curve began shifting to the left, but expansionary policy continued to shift aggregate demand to the right and kept the economy in an inflationary gap.
Expansionary Policy and an Inflationary Gap Kennedy proposed a tax cut inwhich Congress would approve the following year, after the president had been assassinated. In retrospect, we may regard the tax cut as representing a kind of a recognition lag— policy makers did not realize the economy had already reached what we now recognize was its potential output.
Instead of closing a recessionary gap, the tax cut helped push the economy into an inflationary gap, as illustrated in Panel b of Figure The expansionary policies, however, did not stop with the tax cut.
Wage increases began shifting the short-run aggregate supply curve to the left, but expansionary policy continued to increase aggregate demand and kept the economy in an inflationary gap for the last six years of the s. Panel b of Figure The s had demonstrated two important lessons about Keynesian macroeconomic policy.
First, stimulative fiscal and monetary policy could be used to close a recessionary gap. Second, fiscal policies could have a long implementation lag. Macroeconomic policy after pushed the economy into an inflationary gap.
The push into an inflationary gap did produce rising employment and a rising real GDP. But the inflation that came with it, together with other problems, would create real difficulties for the economy and for macroeconomic policy in the s.
Troubles from the Supply Side For many observers, the use of Keynesian fiscal and monetary policies in the s had been a triumph. That triumph turned into a series of macroeconomic disasters in the s as inflation and unemployment spiraled to ever-higher levels.
The fiscal and monetary medicine that had seemed to work so well in the s seemed capable of producing only instability in the s. The experience of the period shook the faith of many economists in Keynesian remedies and made them receptive to alternative approaches.Richard Thaler was recently announced as the recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (aka The Nobel Prize) “for his contributions to behavioural economics.” Thaler is essentially the father and most noted proponent of the field of behavioral economics as well as its offshoot, behavioral finance.
Keynesian Economics is an economic theory of total spending in the economy and its effects on output and inflation developed by John Maynard Keynes.
They prefer the economics of John Maynard Keynes, also known as "Demand-Side Economics" (What Is Demand-Side Economics? Supply-side economics and demand-side economics exist in this relationship: If Say is right, Keynes's economic scheme has no . The Differences Between Supply Side and Demand Side Economics.
Updated on October 6, ecoggins. Supply side economics is the type of economic theory espoused by Ronald Reagan and most in the Republican party. Supply side theory is aimed at increasing the supply of goods and services available to consumers.
Keynesian economic . Two controversial economic policies are Keynesian economics and Supply Side economics. They represent opposite sides of the economic policy spectrum and were introduced at opposite ends of the 20th century, yet still are the most famous for their effects on the economy of the United States when they were used.
Mar 01, · Keynesian economics is an economic theory based on the ideas of John Maynard Keynes (Jackson 29). First published in , Keynes's theory suggests that general trends may overwhelm the micro-level behavior of individuals.