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Unformatted text preview: Lecture 6 Classical Macroeconomics I. Output and Employment a. Production capital fixed, labor variable, quantity of labor determines output. Productivity determines labor demand b. Labor demand from real marginal productivity, labor supply based on real wages. c. Everything relies on real variables, so a change in nominal variables has no impact. i. Price level doubles => wages double to get labor market clearing. ii. Price level doubles and wages double => no change in real wages, no change in labor employed, no change in output. d. Aggregate Supply vertical, as price level does not influence output. II. Money, Prices, and Interest a. Quantity Theory i. Implicit theory of demand based on identity, doesnt give determinants of demand. ii. MV=PY iii. Quantity Theory states V and Y are exogenous. So, M and P move in direct proportion....
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- Fall '08