NON_KEYNESIAN_MODELS - 1 Economics 304L INTRODUCTION TO...

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Economics 304L INTRODUCTION TO MACROECONOMICS Spring 2004 NOTES ON NON- KEYNESIAN MODELS 1) All of these models have in common a rejection of the fundamental Keynesian model because: A) They believe if markets were left alone, they would reach market-clearing equilibrium prices and wages. Markets would work their way out of disequilibrium situations, including unemployment rates above the natural rate. They accept the classical labor market model, where the wage rate would move to where quantity demanded of labor equals quantity supplied of labor. They reject notions that wages/prices are sticky/rigid. They believe that market adjustments would work quickly. B) This belief about markets would also lead to the belief that input prices would adjust quickly to change in the Price Level. Therefore, AS would be vertical – maybe evening the short run – certainly in the relevant time period. Therefore, Y will always return to Potential Y or FE Y, which is the Y consistent with the natural rate of unemployment. This also means that you cannot change Y by changing AD.
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NON_KEYNESIAN_MODELS - 1 Economics 304L INTRODUCTION TO...

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