Monetarist and New Classical theories
Explain the evolution of the Monetarist and New Classical theories.
The monetarist analysis of the economy places a great deal of stress on the velocity of money, which is defined as the number of times a dollar bill change hands, on average, during the course of a year. The velocity of money is the rates of nominal GDP to the stock of money, or V=GDP/M= (P x Y) (M. Alternately, M x V=P x Y). The New Classical model, firms are assumed to be perfectly aggressive “price takers”, with no control over the price. For instance, manufacturing firms, airlines, and many other firms can choose exactly what price to set, but they have no control over the amount sold (Gordon, 2009). New Classical approach originated by Milton Friedman, then at the
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By looking at the blow on national saving as a percent of GDP; we are able to ignore the multiplier effects of these fiscal policies. Since national saving is the sum of government saving and private saving, for each item we must settle on the effect of each. (1) Government tax revenue falls but private saving does not necessarily rise since money can be switched from taxable saving accounts to tax-free retirement accounts. National saving may rise or decline ((Gordon, p.392). As these nations sell more in the United States, they earn the purchasing power to buy more from America. American exports, therefore, increase because the only way for foreigners to buy more from Americans is for Americans to sell more to foreigners. the free trade agreement between Korea and the United States will be revived when President Obama visits the country later this year—but the pressures of protectionism will resist this progress, even as they submit to the practical realities of a globalized economy.
Define Supply-Side Economics and discuss how it explains the government Spending Deficit.
Focus on incentives to inspire supply, supply side economists believe that if we lower taxes, workers will work harder and save more and firms will invest more and produce more. At their most extreme supply-siders argue