Economic Models & US Economic Performance

This research examines five models for explaining economic activity in a marketbased economy, and assesses American economic activity from 1981 to 1992 in the context of these models. The five models are classical, neo classical, monetarist, neo Keynesian, and supply side.

Description and Explanation of the Models

Ray Rees (1984, p. 124) differentiated between classical economics, and the classical school. In the context of this differentiation, he stated, on the one hand, that the classical period of economics began with Adam Smith's Wealth of Nations in 1776, and ended with John Stuart Mill's Principles of Political Economy in 1848, while on the other hand including Alfred Marshall and Arthur Pigou in the classical school.

Adam Smith was a contemporary and a friend of David Hume, and he traveled to France several times to meet with the leading thinkers of Physiocracy. Thus, while Adam Smith is considered to be the founder of classical economic theory, he, nevertheless, incorporated several important concepts from thinking not generally ascribed to the classical school. Hume's contention that the rate of interest depended on the rate of business profits formed the basis for Smith's interest rate theory, and Hume's quantity of money theory remains a part of economic theory. While neither David Hume nor the Physiocrat thinkers are included in the classification of classical economists, the fuzzy b

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nd (4) the concept of diminishing returns (each additional unit of a product adds to one's utility, but does so at a diminishing rate). These four concepts and principles permitted neoclassical theorists to develop the general equilibrium principle, which holds that an economy is always in equilibrium (Hausman, 1984, p. 34). Assuming that the general equilibrium principle was valid, most neoclassical economists held that a prolonged economic depression was not possible.In the context of monetary theory, the neoclassicists adhered to the quantity of money theory (Ekelund and Hebert, 1983, pp. 135139). In the context of the quantity of money theory, and consistent with the principal of substitution, the neoclassical theory held that money was held primarily for transactions purposes. In this context, also, neoclassical theorists made a distinction between real and nominal values of money (Bell, 1981, p. 60). The real value of money was expressed in terms of the tangible products and services money would buy. The nominal value of money was expressed in monetary units. Although neoclassical economists recognized that purely nomi
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Approximate Word count = 4410
Approximate Pages = 18 (250 words per page)