KW_Macro_Ch_17_Sec_01_Classical_Macroeconomics

KW_Macro_Ch_17_Sec_01_Classical_Macroeconomics - chapter 17...

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>> The Making of Modern Macroeconomics Section 1: Classical Macroeonomics chapter 17 The term macroeconomics appears to have been coined in 1933 by the Norwegian econ- omist Ragnar Frisch; the date, during the worst year of the Great Depression, is no accident. Still, there were economists analyzing what we now consider macroeconomic issues—the behavior of the aggregate price level and aggregate output—before then. Money and the Price Level In Chapter 16 we described the classical model of the price level. According to the classi- cal model, prices are flexible, making the aggregate supply curve vertical even in the short run. In this model, an increase in the money supply leads, other things equal, to an equal proportional rise in the aggregate price level, with no effect on aggregate out- put. As a result, increases in the money supply lead to inflation, and that’s all. Before the 1930s, the classical model of the price level dominated economic thinking about the effects of monetary policy.
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