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Chapter 15 - “invisible hand” • Keynesian theory...

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Chapter 15- Foundations of Macroeconomics Business cycle o Peak (boom) o Contraction (recession or downturn) o Trough (depression) o Expansion (recovery or upturn) Thomas Malthus- population dynamics approach o Subsistence and population S-curves Joseph Schumpeter- developed a business cycle theory around major innovations that may partially explain major long-term business fluctuations. o Railroads, automobiles, etc led to economic growth for extended periods. Classical macroeconomic theory- stresses coping with scarcity from the supply side as the key to macroeconomic vitality and supports market solutions to problems and laissez- faire government policies. o Relies on the self-correcting power of automatic market adjustments (Smith’s
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Unformatted text preview: “invisible hand”) • Keynesian theory- views inadequate demand as the cause of cyclic downturns and recommends actively adjusting government policies to combat instability. o Government can counter business cycles by adjusting aggregate demand through government tax and spending policies. • Exports add to aggregate demand and detract from aggregate supply. • Imports enhance supply and may reduce demand. • Increases in aggregate demand tend to raise national income and output, employment, and the price level. • Increases in aggregate supply exert downward pressures on prices and facilitate growth of employment and national income and output....
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