Unit 3 (2/19/15) The three schools of economics

The three school of economics 
1. Classical
2. Keynesian
3. Monetary

1. Classical
-Adam Smith: Invisible hand, market will function by itself
-John B. Say: Say's law, supply creates its own demand
-David Ricardo
Alfred Marshall
-The economy is always close to or is at full employment.
-Trickle down effect: Help the rich first everyone else later.
-AS = AD at full employment equilibrium.
-In the long run the economy will balance at full employment.
-AS determines output
-Savings (Leakage) = investment (injection)
-Savings increase with interest rates
-Prices and wages are flexible downwards.
-Laisseze Faire.

2. Keynesian 
-Economy is not always close to or at full employment.
-There is government intervention.
-Fiscal policy.
-John Maynard keynes: competition is flawed, AD is AD is keyed and not AS. (AD determines its own output and demand creates its own supply.)
-Leaks cost constant recessions.
-Savings cos recession.
-Savors and investors save and invest for different reasons.
-Savings are inverse to the interest rate.
-Ratchet effect and sticky wages block say's law.
-Prices and wages are inflexible downward.
-Since there isn't a mechanism capable to determine full employment, in the long run we are all dead.
-Do add stabilizer
-Use expansionary and contractionary policy.

3. Monetary
-Allen Greenspan
-Ben Bernanke
-Fine tuning is needed
-Voters wont allow contractionaryn options.
-Congress cant time policy action
-Institute tight money/easy money
-We change required reserved of needed .
-We buy and sell bonds through open market operations.
-We use interest rates to change the discount rates and the federal fund rate.