Classical Economics Overview
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Questions and Answers

What is Classical Economics?

The theory that free markets operate under the laws of supply and demand and can and will regulate themselves.

What is Capitalism?

An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations.

Who developed Capitalism and in what work?

Adam Smith in 'An Inquiry into the Nature and Causes of the Wealth of Nations' (1776).

What does Laissez Faire mean?

<p>Economic doctrine that opposes the intervention or regulation by the government in business practices.</p> Signup and view all the answers

What will there always be in a capitalistic economy?

<p>Unemployment.</p> Signup and view all the answers

How does the economy work itself out?

<p>People buy what they want, sellers sell for profit.</p> Signup and view all the answers

What is the Law of Demand?

<p>Quantity demanded of a good falls when the price of that good rises, and vice versa.</p> Signup and view all the answers

What is the Law of Supply?

<p>Quantity supplied of a good rises when the price of that good rises.</p> Signup and view all the answers

Who is David Ricardo?

<p>An economist known for his idea of distribution that divides national product among three economic social classes.</p> Signup and view all the answers

What is Keynes' Theory?

<p>The government has a responsibility to control the economy for the good of the people.</p> Signup and view all the answers

What are the Four Main Components of Keynes' Theory? (Select all that apply)

<p>Engage in deficit spending when necessary</p> Signup and view all the answers

Who are some Adopters of Keynesian Economics?

<p>Franklin D. Roosevelt, Richard Nixon, Ronald Reagan, Barack Obama.</p> Signup and view all the answers

What were Franklin D. Roosevelt's contributions during the Great Depression?

<p>New Deal Policies.</p> Signup and view all the answers

What economic actions did Richard Nixon take?

<p>Deficit spending to end recession.</p> Signup and view all the answers

What is supply-side economics as related to Ronald Reagan?

<p>Lowered taxes to stimulate economic growth.</p> Signup and view all the answers

What is Barack Obama's connection to Keynesian Economics?

<p>Stimulus Package aimed to revive the economy.</p> Signup and view all the answers

What was a significant success of Keynesian Economics?

<p>The Great Depression: pumping money into public projects caused unemployment rate to decline.</p> Signup and view all the answers

What was a failure of Keynesian Economics?

<p>In the 1970s, inflation increased and people began losing faith in Keynes' theory.</p> Signup and view all the answers

What is a Stimulus Package?

<p>A package designed to help the economy through tax cuts and government spending.</p> Signup and view all the answers

What does Washington believe about the financial system?

<p>The Federal Reserve cannot succeed alone because the financial system is in disarray.</p> Signup and view all the answers

What are the pros of a Stimulus Package? (Select all that apply)

<p>Investment more likely to occur</p> Signup and view all the answers

What are the cons of a Stimulus Package? (Select all that apply)

<p>Increasing numbers of companies seeking bailouts</p> Signup and view all the answers

What is Consumer Confidence?

<p>A lot of the economy's success is based on consumer confidence.</p> Signup and view all the answers

Study Notes

Classical Economics

  • Operates under laws of supply and demand, regulating itself without government intervention.

Capitalism

  • An economic system characterized by private ownership of production, distribution, and exchange of wealth.

Adam Smith

  • Author of "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776), laying the groundwork for free competition and trade.

Laissez Faire "Invisible Hand"

  • Economic principle advocating minimal government interference in business, promoting self-regulation.

Unemployment in Capitalism

  • Continuous unemployment exists as individuals choose their employment opportunities.

Self-Regulating Economy

  • Economy functions as consumers purchase desired goods while sellers aim for profit.

Law of Demand

  • Quantity demanded decreases as the price rises, and increases when the price falls.

Law of Supply

  • Quantity supplied increases with rising prices, and decreases when prices fall.

David Ricardo

  • Proposed a distribution model dividing national output among three social classes: laborers, capital owners, and landlords, where gains for one class often mean losses for another.

Keynes' Theory

  • Advocates for government responsibility in managing the economy for public benefit.

Four Main Components of Keynes' Theory

  • Engage in deficit spending to improve GDP.
  • Control money supply.
  • Maintain higher income with progressive taxation.
  • Encourage lower interest rates to boost investment.

Adopters of Keynesian Economics

  • Leaders such as Franklin D. Roosevelt, Richard Nixon, Ronald Reagan, and Barack Obama utilized government intervention in the economy.

Franklin D. Roosevelt

  • Implemented New Deal policies during the Great Depression, many later deemed unconstitutional.

Richard Nixon

  • Employed deficit spending to address recession, economic issues persisted during Carter's presidency.

Ronald Reagan

  • Introduced supply-side economics, cutting taxes to spur growth and improve job rates.

Barack Obama

  • Implemented a Stimulus Package to counter recession, effects still debated post-implementation.

Success of Keynesian Economics

  • Notable during the Great Depression, with government-funded projects reducing unemployment.

Failure of Keynesian Economics

  • The 1970s experienced inflation and criticism of government spending, leading to a return to classical economic thinking.

Stimulus Package

  • Utilizes Keynesian principles to revive the economy, particularly highlighted during the 2007-08 crisis, focusing on increased government spending to compensate for decreased consumer spending.

Washington's Economic Belief

  • Federal Reserve alone is insufficient; government borrowing is necessary to inject money into the economy.

Pros of Stimulus Package

  • Increases money circulation, aiding businesses in loans, fostering job creation, and encouraging investments in new projects.

Cons of Stimulus Package

  • Risks deeper national debt, increased bailouts, and challenges in determining effective fund allocation.

Consumer Confidence

  • Vital to economic performance, heavily influencing success and stability of the economy.

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Description

Explore the fundamental concepts of Classical Economics, including supply and demand, capitalism, and key figures like Adam Smith and David Ricardo. This quiz delves into the principles of a self-regulating economy and the significance of laissez-faire economics. Test your knowledge on how these concepts intersect with modern economic thought.

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