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Macro_Final_study_guide - Theories Classical Economic View...

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Theories - Classical Economic View o Very conservative o Economy will stabilize itself- government involvement not needed (could be detrimental) o Prices and wages flexible - Keynesian model of economics o Prices and wages do not fall rapidly in the face of unemployment o Spending drives the economy/multiplier system - Supply-siders o Encourage tax cuts more to promote long-term growth than to stimulate aggregate demand - Permanent income theory o The impact on consumption of a change in income is greater if the change in income is one that can be expected to continue - Rational expectations o people use all available information and make unbiased forecasts o a policy decision to push unemployment below the NAIRU would very quickly give us accelerating inflation o work with short-run and long-run Philip’s Curves - Minsky hypothesis o Financial markets inherently unstable Just by change= periods of good times Good times=confidence Very good times= arrogance o Irrational expectations o Overestimate returns, underestimate risk Rapidly rising asset prices and debt= asset bubble Reality hits= asset prices drop - Solow’s neoclassical growth model o Q=TL 3/4 K 1/4 T=technology L=Labor (# of workers) K= capital (# of machines) o % Q= % T+ 3/4% L+1/4% K - Lucas critique o Behavior may change if policy changes (what worked in the past may not work in the future) o Not assume what worked in past will continue to work if change policy Formulas - GDP, NDP o Nominal GDP, real GDP, deflator % NGDP= % deflator + % RealGDP - Keynesian Multiplier (Consumption function)
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o C= x +MPC(DI) - Equilibrium level of output
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Macro_Final_study_guide - Theories Classical Economic View...

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