Schools of Economic Thought
A group of economists are having a discussion. Pay attention to what each of them has to say and try to determine what school of economics each of them is associated with. Bob: Well here we go again! We are entering a recession. If only the government would stay out of the economy and restrict the Fed to just operating by a monetary rule, we wouldn’t have as much volatility in the economy.
William: Oh, come on, the government must manage the economy. The Federal Government must conduct active Fiscal Policy and the Federal Reserve must conduct active Monetary Policy (although it’s not as effective as Fiscal Policy because of the liquidity trap). Left alone, the economy would be very slow or unable to recover. Prices and wages are sticky. In the long run, we’re all dead. Tony: I can’t believe your stupidity! How could you really believe that! The New Classical Policy Ineffectiveness Postulate tells us that active fiscal and monetary policy does not work. Andrew: You are all short term thinkers. These excessive marginal tax rates are damaging our long term economic growth. We need to lower taxes. Lower rates will encourage workers to work and investors to invest. I’ve discussed it in the past with some others, and I agree that these massive government spending programs are crowding out private consumers and investors. Each economist falls into one of the following schools. Use a school of thought only one time: Keynesian
Bob = Monetarist
William = Keynesian
Tony = Rational Expectations
Andrew = Supply side
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