Warm-Up: Review What are the main

differences between the Democrats & Republicans economic theories & policies?

Which party was: FDR? Adam Smith? Explain…

Two Major Political Parties

Democrats Republicans

Two Major Political Parties

Democrats Republicans

Liberal, Left, supported by labor, help out individuals in society

Conservative, Right, supported by big business, the individual help his or her self

UNIT IEconomic Theories and

Economists

Warm Up/Review1) What is the danger of inflation

rising too quickly?2) What are the dangers of having

too high of an unemployment rate in the U.S.?

3) Who are the 3 economic Presidents? And, under what time period did each president serve in office?

Economic Presidents:

1. President Hoover (≈early 1930’s)2. President Carter (≈late 1970’s)3. President Bush Sr. (≈early 1990s)

~Keep this in mind when we learn about different economists and

their theories~

1. Adam Smith“Classical Economics”

Father of Modern Classical Economics

Believed in Laissez-faire/Government should not get involved

Invisible Hand (profit) drives individuals

2. JOHN MAYNARD KEYNES“Keynesian Economics” Was FDR’s economic advisor “guru” during

the Great Depression Unemployment was at a record high of 25%

in 1932 He advised FDR that the govt. had to

intervene and take action This was a huge departure from classical

theory His solution=govt. needs to spend money Spending is the key to creating demand in

the economy

Government Spends Money

Creates New Jobs

People Have More Money to Spend

Gov’t collects more taxesSlowly Pulls the Country out of a Recession

3. MILTON FRIEDMAN“Monetarism”

His ideas became popular in the 1970’s – What president did he influence the most?

Money supply (MS) is the key to stabilizing the economy

Follow monetary rule-increasing MS at 3-5% every year

If the money supply increases a little every year, it balances out the increase in prices every year.

Economy will remain stable.

4. Robert Lucas“Rational Expectations Theory”

His ideas became popular in the 1990’s – What president did he influence the most?

Believed in monetary rule Same as monetarism:

increase the MS 3-5% Also believed in balanced

budget (govt. spending = total tax revenue) Don’t allow the govt to go into

debt. Keep the government accountable to balancing its budget!

Wrap Up How are Smith and Keynes

different from one another? How are Friedman and

Lucas similar to each other? Rank the 4 theorists from

best to worst (1-4) and explain your choices – EXPLAIN!!

Quick Quiz: True or False

1. Adam Smith is called the father of modern economics.

2. The monetary rule states that the money supply should decrease 3-5% every year.

3. Keynes believed that the government should not intervene during the peak of the Great Depression.

Who am I? [Activity]

Read through each description and determine which economist and economic theory it is describing. Then, cut and glue under the appropriate column.

Also, match each picture with the correct economist and theory. Provide a brief explanation of how the picture illustrates each theory inside your brochure.

GRAPHS!

Phillips Curve There is an inverse

(opposite) relationship between inflation and unemployment.

When one is high, the other is low; and vice versa.

Graphing: #1Draw a correctly labeled Phillips Curve from the information give in the following table:

Period Unemployment Rate Inflation Rate

Last year 4% 9%

This Year 7% 5%

Laffer Curve When tax rates are

lower, the government collects more total tax revenue because spending will go up.

Graphing: #2Draw a correctly labeled Laffer Curve from the information give in the following table:

Period Tax Rate Tax Revenue

Last year 25% 190 mil.

This Year 22% 210 mil.

$$CASH QUESTION$$: Would this be a Democratic or Republican tax policy? Explain.