Classical vs. Keynesian Economics
Ok, so I know a we bit about economic theories, but I'm looking for people who really know their shit. Here are my questions:
1) How would a Keynesian and Classical economist differ in their view of government spending and aggregate demand and aggregate supply?
2) I have a premise: Inflation is due to micro-decisions of greed on the part of the supplier to maximize as much profit as possible without pricing themselves out of the market.
Please comment on both of these.
1) How would a Keynesian and Classical economist differ in their view of government spending and aggregate demand and aggregate supply?
2) I have a premise: Inflation is due to micro-decisions of greed on the part of the supplier to maximize as much profit as possible without pricing themselves out of the market.
Please comment on both of these.
Comments (58)
I'm not sure what you are asking here. Are you asking about distribution of taxation or social welfare?
Quoting schopenhauer1
Inflation, classically is defined as an overabundance of money to every individual in the market, creating an inflation in prices.
Regards.
No, for example, the US is spending trillions of dollars on aid and stimulus bills. Classical and Keynesian economists might differ on the efficacy of that.
Quoting Shawn
So yes, that is what inflation is, but it is not quite the cause of inflation. It's a necessary condition, but not sufficient. Something else besides more money, creates inflation. My theory was that because there is more money, suppliers anticipate this, or they see behaviors (like people being able to buy more), and then they see they can maximize more profit and increase their prices.
1) Keynesianism takes the view that the government can curb economic downturns by public sector replacing the falling aggregate demand in an economic recession. Classical economics simply takes the view that the economy simply has to get back to it's balance by the market mechanism and this implies that we have to bear that economic downturn. After it the economy is far healthier. Keynesian economics means that the government tries to manage the economic downturns and hence ease the depth of an economic recession or a depression. (And btw. Keynes talked about many issues, so "Keynesian" is rather a broad definition.)
Quoting schopenhauer1
Nope.
Inflation, the rise of prices, basically happens because when money loses it's value. If something is high in demand and the supply cannot meet up with it, that is normal market mechanism at work when the prices rise. In your example the supplier is just trying to find the optimum for his profit: higher prices mean less buyers, lower prices more buyers. What is the optimum is one of those things a supplier has to find. Inflation is a monetary phenomenon. Asset inflation is a bit different, but has the same mechanism behind it.
Yes, I know that, but I am talking very specifically here. So why would government spending be bad in classical economics? They think it will cause inflation and worse-off results. Keynesians would say that it does not necessarily cause inflation as it can only target certain sectors and not all at the same time.
Quoting ssu
So this debate came from a debate I had and I too was mentioning the classic inflation from money supply increase due to monetary policy from central banks. However, there is also demand-pull inflation which causes inflation from government spending (causing debt).
So usually more money is pumped into the system. But the actual increase in prices comes from certain human behaviors. JUST having more money in the economy doesn't in itself raise prices. What does raise prices is suppliers anticipating this increase in supply and/or seeing demand rise, and realizing they can make more money by increasing prices.
Sounds Marxist. I'm sorry; but, modern day economics is based on rationality. To say that greed dictates the evaluation of prices or even price gauging (which is abhorred in economics) sounds fruity.
Um, what do you call it when someone raises prices on a customer because he can make a better buck, yet still has plenty for a good standard of living? Even so, take the greed part out.. my point was describing WHAT causes the raise in prices. If you want, it is simply the supplier increasing prices based on a perceived rise in demand.
Sounds fruity is not very rational itself, but certainly points to a trolling tendency. I'd use better descriptors.
A monopoly?
Quoting schopenhauer1
Essentially, a market failure or lack of competition in neoclassical economics.
Quoting schopenhauer1
Yeah, that can be true.
No that's not a monopoly, that is increasing prices. Any business owner can do that.
Quoting Shawn
No you can have any type of company raise prices if they perceive a higher demand.
Quoting Shawn
Cool
In a market, where there is competition in contrast to a monopoly that dominates the market segment it exists in, there's can't be arbitrary rises in prices for goods provided by said rational agent.
Quoting schopenhauer1
See above.
All the companies would raise their prices.. this is why I said micro-decisions affect the whole thing.. all companies will eventually raise prices with increase raise in demand.. this will affect yet other companies downstream who will need to raise prices due to increased costs, and on and on.
Yes, in an oligopoly they would, if there were some hidden agreement among participants.
Quoting schopenhauer1
Perfect knowledge would allow that, which leaves two things as possible, either a conspiracy or an event outside the realm of market supply or demand.
It's not perfect knowledge.. If you give people $1200 and they spend it on consumer goods.. those companies start perceiving an increase in demand. They do a calculation to see if they would make more money raising prices because they know people are buying more. They raise it enough to make more money without losing too much business.. The profit increases marginally the prices raise marginally, you have inflation.
Well, there's an implicit assumption made here. Let me elucidate.
Quoting schopenhauer1
If all people started buying goods with such new disposable income, then, yes, there would be a rise in prices.
Quoting schopenhauer1
Who does the calculation? Again, you're assuming the invisible hand is all knowing, which is a common misconception of economics.
Well, actually that's my point kind of. Inflation is simply collective decisions over time of micro-decisions that are based on suppliers trying to make more profit..
Well, that would be true if an event in the market caused a uniform rise in prices. Such events are extremely rare, or a collusion between market suppliers is complete.
But, then again, look at the increase in prices in N95 masks due to something unforeseen as Coronavirus.
So you hit on something that Keynesians might say.. that inflation is not all at once but from only a few sectors thus not raising all prices. Classical economics would tend to say that government spending (that is not there.. deficit spending in other words) would create unnecessary inflation that would simply raise prices overall on supply due to suppliers seeing increase in demand. Or that is how I've heard it. If someone else wants to chime in and correct me, feel free to do so.
I haven't read Keynes's General Theory; but, to the best of my knowledge, they would implement in an active manner a price ceiling, if goods were becoming too expensive for all rational agents. This would be accomplished by subsidizing goods.
In neo-classical economic theories, I suspect that given they want, through laissez faire, the market to correct itself. An ideal that never really works or ever worked.
Keynesian theory is always looking for where things don't actually clear.. sticky wages, uneven inflation, etc. This is where governments can step in to promote this.. it is more demand side economics, not supply side.
Keynesian economics assumes that prices are elastic. I'm not sure where you're getting the notion that prices are inelastic. Even the prices for core goods are elastic. Again, you'd require something really extreme of an event to cause a uniform rise in (core) goods, where competition is rife.
What you might or as it seems to me, getting at, is a collusion in the market. Is that so? This is where Keynes is superior to laissez faire economic theories, with government oversight over the fluctuation in prices.
I'm not saying they are not elastic. I'm not sure where you're getting that. I'm saying that more demand increases prices.. We know that.. but why? Suppliers raise prices.
Quoting Shawn
There is definitely that in gas prices and such, but price increases don't have to happen because of that. An economist who tries to give the benefit of the doubt will say that the price increases are due to increased capital and employment to make more supplies. That may be the case. However, there is just good ole fashion seeing how much one can make knowing the increase in demand is occurring. The tendency seems to be mechanization anyways, which would stabilize more, or less the costs from labor, and then it would really just be doing calculations on how much you can raise prices before you lose money on less sales.
Even Keynes admitted that government spending has to be in the long term balanced, but who would then at the time of the economic upturn save money for a rainy day? Usually the times of strong economic growth are seen as a goldilocks economy or the "new economy". I remember quite well some time ago before the "Great Recession of 2008" commentators saying that economic fluctuations are a thing of the past. Above all, one should understand that economics is far closer to it's old name, political economy, and politics does play here part. Economists think that they can handle these issues without involving politics into the equation, but it simply isn't so.
Quoting schopenhauer1
Well, I may be here so "old-school" that what you explained still sounds like normal market mechanism working. You can call it demand-pull inflation (or cost-push inflation), but I wouldn't use those terms as it confuses a bit the terms in general. As if anything raising the prices is inflation and anything lowering the prices is deflation. If there's an exceptionally good harvest or a catastrophic harvest failure, I wouldn't call the price decreases or increases a sign of deflation or inflation. But of course you can use the economic terms demand-pull and cost-push inflation.
This comes out of an argument whereby the person was against the government spending because, he claimed, it would cause inflation. That just got me thinking about how exactly inflation works. Just by saying that more money is injected into the economy causes inflation doesn't get at it. WHY does more money injected cause inflation? Because people will buy more. This demand will cause one of two things 1) suppliers to need to spend more on resources to create the supply for more demand or 2) suppliers to see an opportunity to make more money by increasing prices. I was addressing number 2 and saying that was possibly a large part of it.. There are no laws in economics that are not actually tied to human preferences, behaviors, and the like. Prices don't increase just because, but because people are deciding to do things.
Actually ordinary people are the last one's in the line.
When the central bank prints more money or devalues it's currency, the first ones to benefit from this are the banks and the large corporations (or in the case of devaluation the companies making exports). They will get more money to spend it first. And when they go after those natural resources etc. that cannot be simply printed more, then market mechanism kicks in and prices rise. This in turn makes things then more costly. Finally the workers notice that their wages aren't keeping up with the prices of goods and they demand a raise, if they are in the position to do so. And once those wages go up, the central bank can then accuse the workers of creating inflation because of their excessive wage demands!
And you are correct that more money injected to the economy doesn't always cause inflation. In the last financial crisis the banks simply used that money to prop up their holdings. And who would take a loan in a time when the natural thing would be to save and be parsimonious? If you are worried that you might loose your job or have lost your job, the last thing people usually do is go and spend more than before.
This is basically what I am talking about.. So what does this mean "market mechanisms kicks in and prices rise"? Suppliers raise the prices to invest in more output or because they think they can make an extra buck. THIS causes prices to rise. Again, it is human behavior. Saying things like "market mechanisms" tries to take the human behavioral element out of this.
Quoting ssu
True although wages going up barely happens or happens at the rate of the inflation of prices.
Quoting ssu
Yeah, savings is a factor classical economics doesn't take in making non-equilibrium.
Ok schopenhauer1, now I can really say that this is economics 1.0. That's why I called it "market mechanism kicks in". When there far more demand than supply, then prices go up. It might not be the individual supplier that raises the prices, it may be the buyer that knows that there's a shortage and simply offers to pay a higher price. Markets are a two way street, you know. It's very naive to think that in a shortage situation it's the suppliers that are raising the prices because of greed.
Quoting schopenhauer1
What makes it a "market mechanism" is the amount of people involved making good (or bad) judgements. That's why we talk about aggregate demand and supply, macroeconomics vs. microeconomics. Not everyone makes good choices. But on average, people are reasonable. And before you say it, yes, there are Animal Spirits as Keynes himself said. Hence many times that market predict things wrong.
Quoting schopenhauer1
Especially now. You see, in the case Weimar Republic and Zimbabwe the government printed money to to pay salaries and direct government purchases. That money goes straight into the economy. This comes public (that the government is printing money to pay it's bills) and the people do understand this and the faith on the currency starts to falter. That causes hyperinflation. That is a different case. In the financial crisis the money went to prop up the banks, basically to pay for the bad loans they had lent. The money didn't hit the economy, hence no inflation.
Now it's likely that the cash given to people won't affect much prices as there is the economy is plunging. For the moment. It's interesting to see what happens.
Quoting schopenhauer1
Is the economy anytime in an equilibrium? I see it always going somewhere, up or down...
Yes they can bid on prices.. but um, how about first come, first serve? All I'm saying is NOTHING has to go down the way that economic models say it does. It's all micro-behaviors of individuals, not "forces" or "mechanisms". Those are hollow words in a human behavioral analysis. I don't know what you call it when there is a shortage and you let people bid for the highest price.. It could be called being "reasonable" or it could be called "greed". BOTH are value statements. Also, a lot of things in reality DON'T work that way. Outside of things like Ebay, it is the SELLER who sets the price, and anticipates or tests what people are willing to pay based on the conditions. No one is at a grocery store saying that they are going to pay $100 for toilet paper if you reserve the first 10 packages for them. Rather, whoever gets there, gets the toilet paper.. If the prices rise, it is not due to bidding but due to the willingness for consumers to pay more and possibly slow the demand to allow for increased production.
Quoting ssu
Ok, I guess we can agree. But "reasonable" is its own sticky point. One person's "reasonable" is another person's "unethical". Reasonable, is a weasel word, just like "mechanism".. it puts the cart before the horse. It assumes too much on what is the case. I think it reasonable that everyone agrees with what I'm saying.. Is that a good definition? Oh, but we are going to then make "some' definition "the" definition of reasonable... and on and on the circular justification goes.
Quoting ssu
Yeah, I think we will have a contraction in supply of various goods and services in general as people have less income, and thus less ability to buy anything, thus less demand. Any government money will be used to pay for things like debt or food, necessities to get by, and even that won't get covered. Thus, I don't think it will lead to inflation as people won't be scrambling for more, but simply trying to maintain.
Quoting ssu
Yeah agreed. It's what to do about it.. Classical economists would say to ride out any economic difficulties, and Keynesians will say that government should give a boost.
In my view an "ethical" price is a marketing ploy and simply hypocrisy.
Or what would you declare an "ethical" price? The price that a supplier has to pay for the resources? The price that a supplier has to pay for resources plus a compensation his or her own "work"? (What on Earth is an "ethical" income for one's work?) Or a price that that pays for the resources, the work, and the investments to produce in the future? You may look at this from the perspective that the "supplier" is being the greedy person here, but I can assure you that the buyer can be the "greedy" one too. We are not forced into slavery now days. Every employer buys our work and we have the option to either take their offer or not to take it. Remember that every person is the "supplier" of his or her own work. And behold, once people are talking about the job market, not the market for vegetables or books, everything seems to suddenly change! Still, it's a market just like with everything else.
Quoting schopenhauer1
Now days it's about just who gets the boost. Is it the few rich people or the one's working on the correct market sector, the one's in a labor union that has the ability to pressure the employers? Just what segment of the population get's the benefit? These things are complicated and politics come to the equation always.
As I understand it inflation results when there is an overabundance of money and a scarcity of necessary and/or desirable items.
So the price wasn't good enough earlier before the high demand? Again, it is all micro-decisions. Costs don't go up for no reason.
Quoting ssu
Never implied we should.
Quoting ssu
Actually, though theoretically true, I'm going to challenge this common notion. Really, a lot of luck and situational context is involved here since we have imperfect knowledge. Usually, we find a job through job boards or "head hunters". Sometimes it is through contacts. Either way, when we find these jobs, we don't necessarily know what we are getting into based on interviews. Sometimes the job is not as it seems. Sometimes the managers, owners, and coworkers are pricks. This isn't all apparent just from the day or two preview for an hour you usually get. Rather, by the time one realizes one doesn't like their work situation, one is already in it deep enough they have to keep going with it at least until they find another job. But it doesn't look good to job hop, so you have that working against you. It also could be timely and take time away from work.. Also, at the end of the day, people are forced into work because they need to survive if they don't want to be homeless, poor, or live in the woods and hack it in the wilderness (or weren't born into money). So there are a lot of small but significant factors that prevent people from fully getting a job they really prefer. Rather, a lot of it is simply giving up preferences, and sometimes those preferences are never met.
Also, the ridiculous notion that just by asking an employer for a raise, you will get one, or find a job that does indeed pay more, is ridiculous. Thus the sticky wages problem. As suppliers raise the prices, wages don't meet those price hikes. Sometimes employers won't do shit to raise their employees wage unless forced by unions or what not. So this defense of the fair employer, and ease of work preferences in the mark, as you seem to be making out is not so cut-and-dry.
Quoting ssu
Certainly do.
Yes (all other things being equal), because inflation is, by definition, a relative increase in the money supply. The $1,200 "given to" various individuals, in this scenario, did not exist before it was given. It is new... an increase. Where that is felt is what remains to be seen. During the previous explosion of the money supply (QE1,2,3) most things did not experience a corresponding increase in price. That phenomena is reserved for where the money goes. The price of a burger at McD's didn't go up 300%...but equity markets did.
So, does the question/argument being proposed mean...
1] WHY does inflation lead to price increases?
or
2] SHOULD inflation lead to price increases?
One is "simply" a function of the supply-demand curve. The other is a matter of ethics/morality and thus, beyond consensus.
Well, one and two, seem almost the same to me, but maybe you can explain. I thought inflation was price increases on a large scale. My point was what is the origin of this phenomena in the supply-demand curve? My theory was it was the supplier raising prices. Sometimes it is to create more output, but a lot of times it is because they want to make an extra buck because they see an increase in demand.
Yes, but what actually causes the raising of prices? That's what my OP was trying to get at. Price increases come from a supplier trying to make more money, either to buy more resources for output or to make an extra buck, perceiving that they can do so.
I'm not puzzled. I'm giving a theory behind WHY the prices go up. You cannot just say low supply and high demand. Actual human DECISIONS make these things happen.
Of course it is individual sellers who decide to raise their prices. But they do not do this in a vacuum. They will raise prices only if the items they are selling are scarce, and there is plenty of money and/or demand for the items in question in the system.
Okay.. you're still reiterating the result and not the cause. And why would they raise prices when resources are scarce?
Because they believe they can sell the item for a higher price. It is the scarcity or abundance of goods that cause the rise or drop in price, but only if money is also plentiful or scarce, respectively.
Individual sellers only know that there is a general scarcity or abundance by following the market; that's what I mean by saying they do not make pricing decisions in a vacuum.
Yes, that's the part I was getting at.
Well, now you are going back passed it. I want to stick with the decisions to raise prices. That is a micro-decision made at an individual level. It is not an inevitability. And please don't use words like rational to just make circular justifications. Anyone can say a decision was rational if they agree with it.
Also increased money supply generally causes a currency to lose relative value in the money markets, which means that purchasing power of, at least, imported items is reduced; and this also pushes prices up
Ah, you just used that word. I requested you use other words as that has no meaning to me here. As I stated, this word can simply be used as a decision you agree with.
Quoting Janus
Sure, another issue, but possibly same origins on the micro-decision level.
The first question requires an answer about human nature. If mankind is naturally or nurturally (forgive the abuse of grammar) selfish/discontent ... or altruistic/content... that is what will be borne out in experience and data such as is seen in supply-demand curves.
I think Machiavelli is spot on with regard to human nature:
"human appetites are insatiable, for since from nature they have the ability and the wish to desire all things and from fortune the ability to achieve few of them, there continually results from this a discontent in human minds..."
Interpreted, we (as a species) are never satisfied and always desire "more". I find that a fair assessment. And, being the case, when, for whatever reason, an average individual discovers an opportunity to achieve "more" they take it. Money is a good, for purposes of this argument, like others. It too has a price. We just identify that price in terms of groceries, electronics, vacations, stocks, etc. When there is relatively more of it, it falls in value compared to other goods (such as those noted) meaning we are less willing to give up those goods for what we would have before. The rarer (relatively speaking) a good is compared to other goods, the more we demand in return for trading it. When the supply of money doubles or triples, the goods previously mentioned become rarer, relatively speaking. This answer certainly leaves out allot, but it approaches a response.
The second question (about SHOULD) is meaningless until the first question is answered. Should it be the case that we always desire more? Is there a point at which we should be content? How are we to discover an answer to that? How are we to know we've discovered the right answer? Is there a "right" answer? It's attempts to answer the second question that has led to the plethora of political/economic philosophies. But even then, the answer to the first question, in my opinion, has remained unchanged. Across political and economic systems, mankind has continued to desire "more". It's why the supply-demand curve has done a reasonably good job explaining what we actually see...regardless of where and when we look (broadly speaking).
I'm not saying I agree with the decision ethically speaking, that is a different questions. To have a rational reason to do something is either to have a deductively valid reason (which does not seem apposite in this kind of case) or a practically valid reason (which does seem relevant to the kinds of cases we are considering here).
Quoting schopenhauer1
If the value of currencies is determined by demand, that is only because people will buy a currency if they think it's price is low and it will go up, or sell a currency if they think it is high and will go down. Those criteria which govern buying and selling decisions are rational, in other words measured, given that the persons participating in the money markets are attempting to profit by doing so. Whether or not such activities are ethical is another question.
But what is the practically "valid" reason? What makes something "valid"? Against whose criteria? Why is that criteria the correct or only way it should be seen against?
Ok, so I originally called it greed, and was chastised for it. Others gloss it over as "rational". I think that is a cute way of putting it, but papers over an assumption of human tendency which seems more like what you are describing with Machiavelli. We always want more. An business owner who was perfectly content making profits at a certain price level may raise price levels if he perceives that he can make a better profit from raising prices. Everyone having more money will cause this perception in owners. But can there be owners who don't actually raise their prices? Is it ALWAYS the case that someone will want to raise their prices when they see an increase in demand? Is that an inevitability?
I do realize this can go the other way. If competition is lowering their prices and they can make more money that way, to keep up, the business owner would have to do the same or go out of business. This may be to their detriment if they don't have the technology or capital to get to that lower price level. If that is the case, they would have to market their product differently, perhaps as a premium good or specialize in a niche market the other company does not penetrate.
You ought not have been chastised. Let's call a spade a spade. If by "greed" we mean an insatiable desire for more then that seems a fair description.
Quoting schopenhauer1
Quoting schopenhauer1
Certainly. Markets are made up of thousands/millions of INDIVIDUALS making choices. There is absolutely room for differing choices. However, taken as a whole, markets show a strong tendency toward price increase in the presence of relative inflation...again, as a whole.
Quoting schopenhauer1
I would say, no, ALWAYS is too strong a word in this instance. There can, of course, be those who choose a different approach. Tools such as the supply-demand curve describe markets in aggregate. They show us a picture of things similar to seeing someone in the shower through shower glass. You can discern a great deal about them (they're naked, they probably male/female, they have short/long hair, they're facing this or that direction, etc etc) but there are plenty of details the glass distorts.
I said:
Quoting Aussie
You asked:
Quoting schopenhauer1
I was speaking of the aggregate. As a whole, yes, markets show a very strong tendency toward that so I believe we may say "we (as a species)...always desire more." This is why supply-demand curves do a fair job of describing what we actually see.
You were asking about individuals and in that case, certainly, there is room for variation from the aggregate.
Interesting conclusion though. What I like is the equation with "rationality" as if that is the only way things must go.. But really then economic supply-demand theory is making a conclusion about human nature. That is a deeper philosophical stance than the theory lets on.
Quoting Aussie
So taken as whole, most people are insatiably wanting more, and will always gravitate towards this tendency based on I guess, the majority of people's nature, which is to want more?
Quoting Aussie
So at the end of the day, putting this together, without using the words rational.. Why does government spending more money and money supply increase cause inflation? So again, I'm asking for a human-centered view here, with motivations not words like "market mechanisms" and things like that. Let's talk about the real decisions behind these models.
-> A distorting event (shocks, booms, crises, , etc)
-->Disequilibrium (relative scarcities of goods, including money, change)
--->Mankind's insatiable desire sees an opportunity for "more" (eg. prices changes)
* working under the model that more money chasing the same number of goods means
consumers will be willing to part with more money for said goods
---->New equilibrium established
If you're driving at individuals see the chance to acquire (or preserve, as the case may be) more for themselves and that leads to adjustments in price levels...then we have no argument. I think it is as simple as that. As a whole, mankind is greedy, and takes advantage of disequilibriums.
As to why government spending and federal reserve actions which increase the money supply cause price inflation...they have the ability to cause larger disequilibiums in shorter periods of time than "the market" acting as a whole. For example, whereas the market can increase the money supply by making loans, they cannot achieve the levels the federal reserve can with their "printing press". It is similar for government spending.
A hypothetical, average, business then will anticipate the increase in demand ("new" money chasing after the same amount of goods) and adjust prices as they can. They want more...no less than you and I.
Those who do not, for whatever reason, will quickly find their shelves empty (being the cheapest game in town). And if the supply-demand curve tells us anything its that empty shelves mean prices could have been higher...demand exceeded supply. Somewhere between being unable to move any product and having bare shelves is a price point that "maximizes" return on investment. Bare shelves mean the business owner fell far short of that maximization...and human nature finds that discontenting.
That is indeed the heart of markets :smile: .
No doubt. Better said, an invisible heart moves the market more than some decapitated hand. At the risk of waxing religious...I think the book of Jeremiah hits the nail on the head.
"The heart is deceitful above all things, and desperately wicked: who can know it?"
Jer. 17:9
1) How would a Keynesian and Classical economist differ in their view of government spending and aggregate demand and aggregate supply?
2) I have a premise: Inflation is due to micro-decisions of greed on the part of the supplier to maximize as much profit as possible without pricing themselves out of the market.
1) A pure Keynesian believes demand creates supply. Effective demand is what supply *reacts* to. When there are less customers, the employer orders less for distribution and hires less workers. When there are more customers, the employer orders more for distribution and hires more workers. Ergo, demand creates supply. Which just means that supply reacts to demand, demand is the deciding factor in the economy. And that's why the role of the government is *essential* in Keynesian theory. Effective demand isn't a number, it's the life-blood of the economy. The deciding factor in a market system. Therefore, the government's role in printing money, keeping people employed, keeping credit stable etc. has a direct implication on the spending/investment rate in the economy, and therefore effective demand.
A neoclassical believes the market is efficient (efficient markets hypothesis) so the government usually gets in the way more than helps. And a classical economist sees aggregate demand and aggregate supply as two separate things. Not bound up together like a Keynesian.
2) It's certainly an aspect of real-world inflation. But you don't get taught that in the textbooks.
Right, it's "only" costs of labor and capital to produce more of the goods. Hehe.