Keynesian economics definition yahoo dating - Definition of 'Quantity Theory Of Money'
It says that over-production and under-production are not sustainable phenomena. Supply-siders argue that when companies temporarily "over-produce," excess inventory will be created, prices will subsequently fall and consumers will increase their purchases to offset the excess supply. This essentially amounts to the belief in a vertical or almost vertical supply curve, as shown in the left-hand chart below.
In the right-hand chart, we illustrate the impact of an increase in demand: On the question of tax policy, supply-siders argue for lower marginal tax rates. In regard to a lower marginal income tax, supply-siders believe that lower rates will induce workers to prefer work over leisure at the margin.
In regard to lower capital-gains tax rates, they believe that lower rates induce investors to deploy capital productively. At certain rates, a supply-sider would even argue that the government would not lose total tax revenue because lower rates would be more than offset by a higher tax revenue base - due to greater employment and productivity.
On the question of regulatory policy, supply-siders tend to ally with traditional political conservatives - those who would prefer a smaller government and less intervention in the free market. This is logical because supply-siders - although they may acknowledge that government can temporarily help by making purchases - do not think this induced demand can either rescue a recession or have a sustainable impact on growth.
The third pillar, monetary policy, is especially controversial. By monetary policy, we are referring to the Federal Reserve's ability to increase or decrease the quantity of dollars in circulation i. A Keynesian tends to think that monetary policy is an important tool for tweaking the economy and dealing with business cycles, whereas a supply-sider does not think that monetary policy can create economic value. While both agree that the government has a printing press, the Keynesian believes this printing press can help solve economic problems.
But the supply-sider thinks that the government or the Fed is likely to create only problems with its printing press by either a creating too much inflationary liquidity with expansionary monetary policy, or b not sufficiently "greasing the wheels" of commerce with enough liquidity due to a tight monetary policy. A strict supply-sider is therefore concerned that the Fed may inadvertently stifle growth.
What's Gold Got to Do with It? This principle is the key to understanding why supply-siders often advocate a return to the gold standard, which may seem strange at first glance and most economists probably do view this aspect as dubious. The idea is not that gold is particularly special, but rather that gold is the most obvious candidate as a stable "store of value.
Keynesian unemployment[ edit ] Saving and investment[ edit ] Saving is that part of income not devoted to consumption , and consumption is that part of expenditure not allocated to investment , i. The existence of net hoarding, or of a demand to hoard, is not admitted by the simplified liquidity preference model of the General Theory. Once he has rejected the classical theory that unemployment is due to excessive wages, Keynes proposes his alternative based on the relationship between saving and investment.
The levels of saving and investment are necessarily equal, and income is therefore held down to a level at which the desire to save is no greater than the incentive to invest.
The incentive to invest arises from the interplay between the physical circumstances of production and psychological anticipations of future profitability; but once these things are given the incentive is independent of income and depends solely on the rate of interest r.
Liquidity preference[ edit ] Determination of income according to the General Theory. Keynes viewed the money supply as one of the main determinants of the state of the real economy. The significance he attributed to it is one of the innovative features of his work, and was influential on the politically hostile monetarist school. In Keynes's first and simplest account — that of Chapter 13 — liquidity preference is a function solely of the interest rate r which is seen as the earnings forgone by holding wealth in liquid form: In Keynes's more complicated liquidity preference theory presented in Chapter 15 the demand for money depends on income as well as on the interest rate and the analysis becomes more complicated.
Keynes never fully integrated his second liquidity preference doctrine with the rest of his theory, leaving the task to be completed by John Hicks: Wage rigidity[ edit ] Although Keynes rejects the classical explanation of unemployment based on wage rigidity it is not clear what effect the wage rate has on unemployment in his own system.
He treats the wages of all workers as proportional to a single rate set by collective bargaining, and chooses his units so that this rate never appears separately in his discussion. It is present implicitly in those quantities which are expressed in wage units while being absent from those expressed in money terms. It is therefore difficult to see whether, and in what way, his results would differ for a different wage rate; nor is it entirely clear what he thought on the matter.
Remedies for unemployment[ edit ] Monetary remedies[ edit ] An increase in the money supply, according to Keynes's theory, will lead to a drop in the interest rate and to an increase in the amount of investment which can be profitably undertaken, bringing with it an increase in total income.
Later in the same chapter he tells us that: Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.
But again the implied recommendation to engage in public works, even if they are not fully justified from their direct benefits, is not taken up when the theory has been constructed. On the contrary he advises us later that The horizontal blue line Is r is the schedule of the marginal efficiency of capital whose value is independent of Y. But insofar as they had had a concept of aggregate demand, they had seen the demand for investment as being given by S Y , since for them saving was simply the indirect purchase of capital goods, with the result that aggregate demand was equal to total income as an identity rather than as an equilibrium condition.
As a consequence of the identity of saving with investment Chapter 6 together with the equilibrium assumption that these quantities are equal to their demands. In agreement with the substance of the classical theory of the investment funds market, whose conclusion he considers the classics to have misinterpreted through circular reasoning Chapter These arguments support each other under Keynes's assumptions but would not necessarily do so under more general ones, e.
The Keynesian multiplier[ edit ] Keynes introduces his discussion of the multiplier in Chapter 10 with a reference to Kahn's earlier paper see above.
Keynes states that there is The schedule of the marginal efficiency of capital is identified as one of the independent variables of the economic system: For when we look upon the Multiplier as an instantaneous functional relation Keynes gave his formula almost the status of a definition it is put forward in advance of any explanation . The resulting multiplier has a more complicated formula and a smaller numerical value.
The liquidity trap is a phenomenon which may impede the effectiveness of monetary policies in reducing unemployment. It has generally been considered that the rate of interest would not fall below a certain limit, often seen as zero or a slightly negative number.
Keynes suggested that the limit might be appreciably greater than zero but did not attach much practical significance to it. Paul Krugman has worked extensively on the liquidity trap, claiming that it was the problem confronting the Japanese economy around the turn of the millennium. Short-term interest rates were close to zero, long-term rates were at historical lows, yet private investment spending remained insufficient to bring the economy out of deflation.
In that environment, monetary policy was just as ineffective as Keynes described. Attempts by the Bank of Japan to increase the money supply simply added to already ample bank reserves and public holdings of cash Keynes's admission of income as an influence on the demand for money is a step back in the direction of classical theory, and Hicks takes a further step in the same direction by generalizing the propensity to save to take both Y and r as arguments. Less classically he extends this generalization to the schedule of the marginal efficiency of capital.
We may construct a graph on Y,r coordinates and draw a line connecting those points satisfying the equation: If we follow Keynes's initial account under which liquidity preference depends only on the interest rate r, then the LM curve will be horizontal.
Understanding Supply-Side Economics :
The supply-side theory is typically held in stark contrast to Keynesian theory which, among other facets, includes the idea that demand can falter, so if lagging consumer demand drags the economy into recession, the government should intervene with fiscal and monetary stimuli. Share Supply-side economics is better known to some as "Reaganomics," or the "trickle-down" policy espoused by 40th U. We may construct a graph on Y,r coordinates and draw a line connecting those points satisfying the equation:
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