eco202_note02 - Macroeconomics Theory and Policy Classical...

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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 D’ - Supply side - - S’ Masoud Anjomshoa 2 Keynesian View: - Quantity - Price Classical vs. Keynesian Views: . Y (GDP) S P D - Supply D’ - Keynesian view is more relevant in short run . Classical view is more relevant In medium/long run .
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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 - Potential Output - Output Capacity - Full Employment Output - Natural Level of 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: Y < Boom: Y > Y Y 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
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eco202_note02 - Macroeconomics Theory and Policy Classical...

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