Transcript economists and economic theories

UNIT I
Economic Theories and
Economists
Warm Up/Review
1) What is the danger of inflation rising too
quickly?
2) What are the dangers of having too high of an
unemployment rate in the U.S.?
3) Who are the 3 economic Presidents?
And, under what time period did each
president serve in office?
Economic Presidents:
1. President Hoover (≈early 1930’s)
2. President Carter (≈late 1970’s)
3. President Bush Sr. (≈early 1990s)
~Keep this in mind when we learn about
different economists and their theories~
1. Adam Smith
“Classical Economics”
 Father of Modern Classical
Economics
 Believed in Laissezfaire/Government should not get
involved
 Invisible Hand (profit) drives
individuals
2. JOHN MAYNARD KEYNES
“Keynesian Economics”
 Was FDR’s economic advisor “guru” during the Great
Depression
 Unemployment was at a record high of 25% in 1932
 He advised FDR that the govt. had to intervene and
take action
 This was a huge departure from classical theory
 His solution=govt. needs to spend money
 Spending is the key to creating demand in the
economy
Government Spends Money
Creates New Jobs
People Have More Money to Spend
Gov’t collects more taxes
Slowly Pulls the Country out of a Recession
3. MILTON FRIEDMAN
“Monetarism”
 Money supply (MS) is the key to
stabilizing the economy
 Follow monetary rule-increasing
MS at 3-5% every year
 If the money supply increases a
little every year, it balances out
the increase in prices every year.
 Economy will remain stable.
4. Robert Lucas
“Rational Expectations Theory”
 Believed in monetary rule
 Same as monetarism:
increase the MS 3-5%
 Also believed in balanced
budget (govt. spending =
total tax revenue)
 Don’t allow the govt to go
into debt. Keep the
government accountable to
balancing its budget!
Wrap Up
How are Smith and Keynes
different from one another?
How are Friedman and Lucas
similar to each other?
Quick Quiz: True or False
1. Adam Smith is called the father of modern
economics.
2. The monetary rule states that the money supply
should decrease 3-5% every year.
3. Say’s Law states that “supply creates its own
demand”.
4. Keynes believed that the government should not
intervene during the peak of the Great
Depression.
5. You are considered unemployed in the U.S. as
long as you are 16 years old.
Who am I? [Activity]
 Read through each description and
determine which economist and economic
theory it is describing. Then, cut and glue
under the appropriate column.
 Also, match each picture with the correct
economist and theory. Provide a brief
explanation of how the picture illustrates
each theory inside your brochure.
GRAPHS!
Phillips Curve
 There is an inverse
(opposite)
relationship
between inflation
and
unemployment.
 When one is high,
the other is low;
and vice versa.
Graphing: #1
Draw a correctly labeled Phillips Curve from the information
give in the following table:
Period
Unemployment Rate
Inflation Rate
Last year
4%
9%
This Year
7%
5%
Laffer Curve
 When tax rates are
lower, the
government
collects more total
tax revenue
because spending
will go up.
Graphing: #2
Draw a correctly labeled Laffer Curve from the information
give in the following table:
Period
Tax Rate
Tax Revenue
Last year
25%
190 mil.
This Year
22%
210 mil.