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ECON202 - Chapter 7

ECON202 - Chapter 7 - ECON202 Book Notes Chapter 7 1 The...

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ECON202 Book Notes Chapter 7 1) The Classical Long-Run Model a) Macroeconomic models: classical versus Keynesian i) Classical model (1) A macroeconomic model that explains the long-run behavior of the economy ii) Keyne’s idea and their further development help us understand economic fluctuations – movements in output around its long-run trend. But the classical model has proven more useful in explaining the long-run trend itself iii) Assumptions of the classical model (1) Market clearing (a) Adjustment of prices until quantities supplied and demanded are equal (2) A critical assumption in the classical model is that markets clear: the price in every market will adjust until quantity supplied and quantity demanded are equal b) How much output will be produced i) Labor market (1) Labor supply curve (a) Indicates how many people want to work at various real wage rates (b) The labor supply curve slopes upward because, as the wage rate increases, more and more individuals are better off working than not working. Thus, a rise in the wage rate increases the number of people in the economy who want to work – to supply their labor (2) Labor demand curve (a) Indicates how many workers firms will want to hire at various wage rates (b) As the wage rate increases, each firm in the economy will find that, to maximize profit, it should employ fewer workers than before. When all firms behave this way together, a rise in wage rate will decrease the quantity of labor demanded in the economy (3) In the classical view, the economy achieves full employment on its own ii) Determining the economy’s output (1) The production function (a) Aggregate production function
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ECON202 Book Notes Chapter 7 (i) The relationship showing how much total output can be produced with different quantities of labor, with quantities of all other
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ECON202 - Chapter 7 - ECON202 Book Notes Chapter 7 1 The...

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