Feb 27 - The classical model If left to its own devices a...

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The classical model: If left to its own devices, a free-market economy is self-correcting in long run How so? Prices and wages will adjust so that L = Lf and Y = Yf The interest rate will adjust so that Yf = C + IP + G It is said in chapter 9 that the classical model cannot explain short run fluctuation in output and employment This re-enforces a message stated in chapter 7 (p 164) “Until the great depression of the 1930s, there was little reason to question these classical ideas, ….but during the great depression output was stuck for below it potential for many years.” (This is a distortion) This is consistent with John Maynard Keynes’s criticism of the classical model: “in the long run we are all dead” The textbook is too harsh in its treatment of the classical model, and misrepresents the lessons to be drawn from the Great Depression 1. One can explain recessions in the context of the classical model 2. Most macroeconomists have come to accept the view that the Great Depression
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