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Note202_02 - Macroeconomics Theory and Policy Classical vs...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 Masoud Anjomshoa 1 Classical vs. Keynesian Views: . Classical View: - Quantity - Price Y (GDP) S P D - Supply side is perfectly - Any increase in demand leads to - To increase output, S’ Masoud Anjomshoa 2 Keynesian View: - Quantity is - Price is Classical vs. Keynesian Views: . Y (GDP) S P D - Supply side is - Increase in demand leads to Keynesian view is more relevant in Classical view is more relevant in
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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 Short Run vs. Long Run: . Time (quarters) Output (GDP) Actual Output, Y - - - - Y Long Run Y Short/Medium Run Y Masoud Anjomshoa 4 Short Run (Keynesian Model): . Assumptions about the behavior of the economy in the Short Run : 1- Price, P, is sticky (fixed) 2- Capital, K, and labor, L, are fixed, so output capacity, , is fixed: Y ( ) L , K F Y = 3- Actual output, Y, can freely go above (below) output capacity, , by over-utilization (under- utilization) of resources (capital and labor). Recession: Boom: Y Y Short/Medium Run Y
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Macroeconomics Theory and Policy Masoud Anjomshoa 3 Masoud Anjomshoa 5 Goods Market: IS Curve Masoud Anjomshoa 6 Goods Market in Short Run: .
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