The Keynesian School Of Thought, The Monetarist School And The Austrian Business Cycle

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This paper will examine three theories regarding economic performance. The Keynesian School of thought, the Monetarist School and the Austrian Business Cycle has different views on how the economy can improve during recessions or other economic downturns. Each is relevant to economic issues during The Great Depression in the 1930’s to the Great Recession in late 2000’s. This paper will discuss the history behind each theory, the specific views on key points in each school of theory and why the founders felt strongly about utilizing those particular concepts. Views on market response and the role of government regarding each philosophy will be considered as well. The Keynesian School During the midst of The Great Depression, John Maynard…show more content…
“The assumption of sticky prices is an essential underpinning of the IS-LM model… as the theory of short-run fluctuations” (Ball & Mankiw, 1994, para 2). When demand decreases because of a downturn in the stock market, for example, many businesses will either produce less of the product or stop selling it altogether. This in turn creates an imbalance between the price to make the product and the price to maintain employees who help make the product. Keynes’ economic theory focused on short-run alternatives. Aggregate demand or total spending was his main focus in regard to his general theory. Price level remains unchanged and real output grows rapidly creating an increase in aggregate demand; other things equal. Further declaring influence in aggregate demand, through economic intervention policies by the government, is the driving force for economic stimulation. In the 1930’s during the peak of The Great Depression the economy saw a decrease in demand because of rises in unemployment, GDP, and an alarming spike in inflation. Keynes purpose in focusing on the behavior of the economy through household and businesses versus the forces of free markets and individual and company behavior; was to prove that inducing aggregate demand could stabilize the economy from such horrid times. Keynes is known for stating “…in the long run, we are all dead” (Blinder, 2014). A large part of Keynes general theory lies on

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