Description 
For the last 200 years economists have struggled to develop models to explain the macroeconomy. Different schools of thought, or paradigms, have arisen as economists develop new ways to explain economic outcomes. In this tool you will learn about four of these paradigms: simple classical, simple Keynesian, new classical and new Keynesian.

In order to better understand these models you should apply your knowledge of the fiscal and monetary policy tools presented in the previous modules. You should note that the tools provided here are not as precise as they were in earlier tools. In the real world, it is difficult to predict with numerical accuracy what the net effect of any policy will be.

There are 10 different policy buttons (4 fiscal and 6 monetary) in this tool. Here is what they mean:

Fiscal Policy Tools:
G+ : Increase in government spending
G- : Decrease in government spending
T+ : Increase in autonomous taxes
T- : Decrease in autonomous taxes

Monetary Policy Tools:
OMO+ : Fed buys bonds
OMO- : Fed sells bonds
rr+ : Fed increases the required reserve ratio
rr- : Fed decreases the required reserve ratio
idr+ : Fed raises the discount rate
idr- : Fed lowers the discount rate

Click on one of the four different paradigms. To read a description of that paradigm, click on the "?" button next to it. Once you have chosen a paradigm, you will see a macroeconomic equilibrium graph consistent with the assumptions of that model. You may then implement a fiscal or monetary policy and see what happens. To get an explanation of what happened in the graph window, click on the "Why?" button.
 
 
 
 
 

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