ECN 302-602 (3), Theories, Models, and The Fundamental Macro Debate

ECN 302-602 (3), Theories, Models, and The Fundamental Macro Debate

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Theories, Models, and The Fundamental Macro Debate Our first venture into theories and models in macroeconomics. Theory -- An assertion about the causes of observed behavior, in order to predict outcomes. Model -- A formalization of a theory, done to make concise predictions.
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Classical Versus Keynesian Macroeconomic Theories -- The Fundamental Debate
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Classical Thought -- The Economy (Adam Smith) Classical Macroeconomics -- Because the nominal wage rate (W), prices (P), and interest rates (i) are flexible , the economy will automatically correct itself without need of policy.
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Classical Response to a Sluggish Economy (Y < Y N ) W labor more attractive to hire P goods and services cheaper to purchase i cheaper cost of borrowing, prompting more durable
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Unformatted text preview: goods consumption and investment Keynesian Thought -- The Economy (1936) ❚ Keynesian Macroeconomics-- Because the nominal wage rate (W), prices (P), or interest rates (i) are inflexible , the economy will not automatically correct itself, and therefore needs overt policy. Possible Reasons for Inflexibility or Stickiness ❚ W ⇒ long-term labor contracts ❚ P ⇒ costly for firms to change prices for goods and services they produce ❚ i ⇒ Federal Reserve target variable for monetary policy Practical Thoughts -- Classical Vs Keynesian ❚ There are several Keynesian models, all based upon inflexibility. ❚ Was the Great Depression an aberration? ❚ What better represents the macroeconomy? ❚ How long is the short-run?...
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ECN 302-602 (3), Theories, Models, and The Fundamental Macro Debate

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