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Unformatted text preview: 1 1 Classical/Monetarist LR Model Â¡ Full employment in LR Â¡ Self-adjusting economy Â¡ Y=f(K,L) natural rate of unemployment Â¡ LRAS Vertical at natural rate output level Â¡ **Money supply->P only** Â¡ Classical Dichotomy/ Neutrality of money Â¡ No Role for Fiscal or Monetary Policy Â¡ Crowding out - G up I down Â¡ Not needed â€“ self-regulating - full emp. Â¡ M->P only thru Quantity Theory of Money Â¡ Real factors determine real variables Â¢ K,L->y,Unemp S&I-> real int rate Â¢ M->P and nominal int rate, nom W Â¢ Classical Dichotomy â€“ Neutrality of Money Â¡ LR Phillips curve is vertical Â¢ SR curve shifts up with expectations 2 Keynesian Review 3 In the News? 2 4 Course Issues Â¡ Stern Lecture Â¢ Quiz 3 appalling 8 0â€™s, 20<2, mean 1.83, std dev 1.5 Â¢ Grades based on performance Â¢ NOT effort, need, etc Â¢ Listening is not Learning Â¡ Question, test your self Â¡ repeat Â¡ Investment Game Round 3â€“ Tuesday Â¡ Quiz 3 answers posted Â¡ Gradebook Â¡ EC -25 points 5 Why? Â¢ Sayâ€™s Law S->D Â¡ What about S not = I? Â¢ Loanable Funds Theory S & D for LF Â¡->ireal and thus S=I at full employment Â¢ Flexible Wages and Prices Â¡ price rather than output adjustment Â¢ Quantity Theory of Money MV=Py Â¡ M->P only since V const and y at fe 6 Say What? Â¢ Economy tends to full employment Â¡ potential gdp=natural rate level of output LR Â¢ No â€˜general glutâ€™â€“if you produce it they will buy it Â¡ Canâ€™t have too little agg demand Â¡ desired I=S always â€“ loanable funds theory Â¢ Real forces of productivity, amount of capital, labor force determine output Â¢ Business Cycle Fluctuations temporary Â¡ automatic adjustment thru price Â¢ No need for policy, and of no use 3...
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