CLASSICALS VS KEYNESIANS VS MONETARISTS VS NEW CLASSICALS
CLASSICALS
Classical theory was the first modern school of economic thought. It began in 1776 and ended around 1870 with the beginning of neoclassical economics. The classical theory was given by Adam Smith. Classical theory reoriented economics away from individual interests to national interests. Classical economics focuses on the growth in the wealth of nations and promotes policies that create national expansion. The key points/assumptions of classical theory are as follow:
1. Self-regulating markets.
2. No govt. intervention in the economy.
3. Supply creates its own demand.
4. Money only affects price and wage level.
5. Prices are flexible.
6. Equality of saving and investment.
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They believe that controlling the supply of money directly influences inflation.
4. They believe that by fighting inflation with the supply of money, they can influence interest rates in the future.
5. In the long-run, the economy is at potential output, so changes in the money supply only lead to higher prices, not higher output.
6. Monetarists prefer the Money growth rule.
7. The theoretical foundation for Monetarism is the Quantity Theory of Money.
8. They stated that velocity is stable in the short run.
NEW CLASSICAL
The new classical economics was developed against the background of the high inflation and unemployment of the 1970s. Robert Lucas is the central figure in the development of the New Classical.
1. The stabilization of the real variables, such as output & employment can’t be achieved by aggregate demand management.
2. Both the policies Monetary & Fiscal are flawed and will not affect the output and employment in the SR and LR.
3. They gave the concept of Rational Expectations, which are not given on the past influences but on the future perspectives and anticipations.
CLASSICALS VS KEYNES VS MONETARISTS VS NEW CLASSICALS
Difference in policy recommendations of Classicals and Keynesians
1. Government