Exploration 15

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Exploration 15

• Variations on the model
• Classical Economics

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Thread

• Economists disagree due, in part, to the way they
  understand the basic nature of the economy. The
  same AD/AS can be used emphasizing different
  assumptions. Here is one school of thought
  based on the general notion that capitalism is
  workably competitive.

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You should be able to

• List and describe the fundamental propositions of
  Classical Economics
• Interpret the Great Depressions using this
  variation of the model

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Classical Economics
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Duplicate slide (no mask)
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Says Law

• Economist of the 1820s
• Supply creates its own demand
• Make candles ? sell them supply ? get income ?
  buy something demand
• Implications no business cycles because
  supply demand

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Classical Model
LAS
P
SAS1
A
P1
SAS2
B
C
Recessionary gap
P2
E
AD
Yf
YR
Y
Quick adjustment from A thru B, C to E
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What caused the Great Depression?

• Government (FED) reduced the money supply
• Money ? ? interest rates ? ?
• borrowing ?? I and C ??AD shifts in ? prices
  should fall ?
• Agricultural prices did fall
• Competitive industry
• Mfg prices did not
• Oligopolies union wages
• Wages and prices are not flexible enough

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Classical Model
LAS
P
P1929
A
B
P1933
FED cuts Money
C
Stuck
E
AD 1929
Prices fell 25 1929 to 1933 Real GDP decreased
30
AD 1933
Y1933
Yf
Y
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Fighting the depression Classical solutions

• Laissez-faire -- Immediate
• Stabilize the money supply
• FED policy was misguided
• Appeal to private charities to assist the
  unemployed
• Controls social unrest
• Wait for wages to fall
• No unemployment insurance then

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Fighting the depression Classical solutions

• Laissez-faire LR
• Make markets more competitive so they adjust
  quickly
• Attack oligopolies anti-trust
• Weaken unions govt regulation

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US Economic History working with the model

• Team Exercise U.S. Economic History
• Do 1 2

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Wrap up What did you learn?

• What are the fundamental propositions of
  Classical Economics?
• What caused the Great Depression? What were the
  solutions?
• How useful was the model to help you interpret
  these events?