DSST Money & Banking Part 1

This dilemma led to the rise of ideas based upon more

Info icon This preview shows pages 2–4. Sign up to view the full content.

clear impossibility. This dilemma led to the rise of ideas based upon more classical analysis, including monetarism,  supply-side economics and new classical economics. This produced a "policy bind" and the collapse of the Keynesian  consensus on the economy.  Classical economics
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Classical economics is widely regarded as the first modern school of economic thought. Its major developers include  Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill. Sometimes the definition of classical economics is  expanded to include William Petty, Johann Heinrich von Th ü nen, and Karl Marx. The publication of  Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of  classical economics . The school was active into the mid 19th century and was followed by neoclassical economics in  Britain beginning around 1870. Classical economists attempted and partially succeeded to explain growth and development. They produced their  "magnificent dynamics" during a period in which capitalism was emerging from a past feudal society and in which the  industrial revolution was leading to vast changes in society. These changes also raised the question of how a society  could be organized around a system in which every individual sought his or her own (monetary) gain. Why would such a  society not collapse in chaos? Classical economists reoriented economics away from an analysis of the ruler's personal interests to a class-based  interest. Francois Quesnay and Adam Smith, for example, identified the wealth of a nation with the yearly national income,  instead of the king's treasury. Smith saw this income as produced by labor applied to land and capital equipment. Once  land and capital equipment are appropriated by individuals, the national income is divided up between laborers, landlords,  and capitalists in the form of wages, rent, and interest. Classical Quantity Theory of Money Demand: 1. Fisherian Approach (Money Demand /  Equation of Exchange) :1911 Irving Fisher published Equation  of Exchange is:  MV=PY , where M is the stock of money, V is the velocity of money, P is the Price level  and Y is the real output in the economy.   The equation can be re-written into the  Classical Demand For Money Equation: M d =(PY)/V.   Based on  this equation, the  Income elasticity of Money is 1.0 regardless of what value V has. Fisher presumed the economy to be perfectly competitive, so the level of output Y would be fixed, and  thus prices would be directly proportional to the Supply of Money Equation of:  P = MV/Y Fisher’s Key points:
Image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern