Lesson_06_-_Chap_11 -...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Lesson 6 Lesson 6 Classical and Keynesian Economics In this unit, we will add the third part of the aggregate supply and demand model, namely short run aggregate supply. Furthermore, we will discuss two main schools of thought in economics: Classical and Keynesian economics. We will differentiate between the two due to a few small, but extremely important assumptions about aggregate supply. Finally, we will put all three curves together. Once again we will ?play? with the model to illustrate an economic issues. Consequently, we will identify, graphically, the two main problems in economics, namely two types of gaps: recessionary (contractionary) and inflationary (expansionary). These problems will be solved in subsequent units. Specifically, we will apply government policy to solve these gaps and maintain our three economic objectives (price stability, economic growth, and full employment). What will we learn in this lesson? When you are done with this lesson, you should be able to: State the basic assumptions of the Classical model and tie it into the long run aggregate supply curve. 1. Introduce the Keynesian model and explain how it differs from the classical model. 2. Put all three curves together in the aggregate supply and demand curve model and find the two equilibria. 3. Recall the five things that shift long run aggregate supply and the sixth determinate for short run aggregate supply only. 4. Find the two gaps in the model: recessionary and inflationary. 5. Use the new model to explain the two types of inflation as well as the effects of the open economy on the model. 6. Questions? If you have any questions, please post them to our I Don't Understand discussion forum (not e-mail), located under the Communicate or the Lesson tab in ANGEL. Your instructor will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you are able to help out another student. Lesson 6 The Classical View of the Macro Economy The viewpoint that dominated macroeconomic thinking during the nineteenth and early twentieth centuries has been termed the Classical view. The Classical economists emphasized the role of competitive markets in the efficient allocation of resources. Their belief that all prices adjusted flexibly led them to conclude that prices in each individual market would adjust quickly to equate the quantity supplied and quantity demanded in each individual market. (When quantity supplied equals quantity demanded in a market, we say that the market has cleared; there are no unmet demands or unsold supplies.) For example, wage rates (the prices of different types of labor) would adjust so that the quantity of labor supplied would equal the quantity of labor demanded, and the interest rate (the price of borrowing money) would adjust so that the level of saving (the supply of borrowed funds would equal the level of investment (the demand for borrowed funds). It is easy to see that this world view leads to the conclusion that business cycles, and in particular economic downturns, are not a serious policy
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/08/2010 for the course ECON 002 taught by Professor Mcleod,markpehlivan,ayseozg during the Summer '08 term at Pennsylvania State University, University Park.

Page1 / 7

Lesson_06_-_Chap_11 -...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online