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# sumassign8 - 1 Intro Macro Assignment 8 N Sheflin NOTES The...

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I n t r o M a c r o N . S h e f l i n Assignment 8 NOTES The Long-Run/Classical Model and Long-Run Inflation and the Phillips Curve – due by THURSDAY 6/18 5pm before class Quiz 4 covering weeks 6-7 Thursday Investment Game – Round 3 – Mutual Funds HELP? Start by posting questions on the discussion boards, asking in class, going to the Learning Resource Center with questions. Private tutoring possible (but not recommended) through econ grad students – email to check on rates and availability if interested. Note that they do not know what we are doing in the course Ms. Costi [email protected] and Mr. Doung [email protected] READING 15 (starting with section on The Aggregate Supply Curve read through end of chapter), 12, 17 (starting at Shifts in the Phillips Curve and also http://www.bized.co.uk/virtual/economy/library/theory/ read the material on classical/neo-classical economics and monetarism. Read about Milton Friedman in Wikipedia at http://en.wikipedia.org/wiki/Milton_Friedman And maybe: http://en.wikipedia.org/wiki/Macroeconomics and hyperinflation article: http://en.wikipedia.org/wiki/Hyperinflation KEY POINTS – note THE key point is that the aggregate supply curve is VERTICAL in the LR Classical model explains long-run tendencies in the economy, and behavior if at full employment Output determined by K, L o Output is at full employment/potential gdp – producing all we can with given amount of labor and capital o Output is insensitive to P (vertical aggregate supply curve) o Output grows with increases in K, L, technology (later) o Unemployment is at the natural rate with only frictional and structural unemployment Interest rates determined by Supply and Demand for loanable funds = Savings and Investment (NOT Ms) o Focus on REAL interest rates (what the interest can buy) Price level determined by Money Supply ONLY o Classical Dichotomy says M affects price level and NOMINAL Variables only ± Real variables determined by real factors Inflation – long-run Phillips curve is vertical – no trade-off with unemployment which is at the “natural rate”. Inflation depends on expected inflation, and changes in expectations of inflation shifts the SR Phillips cuve along a vertical long-run curve. Changes in the money supply are the cause and cure for lr inflation. Policy o Not needed since self-regulating economy tending to full employment o Fiscal Policy – not needed, no effect due to complete crowding out o Monetary Policy – not needed and affects only P and inflation Monetarism o Friedman – money important determinant of SR fluctuations also; otherwise, classical lr view. Classical Macroeconomics: - This was the prevailing view of how the macro economy worked pre 1930's . It focused on long-run equilibrium and was an extension of standard microeconomics. Thus it concluded that the macro-economy was self-regulating, tending towards full employment in the long-run, with no need for government intervention. Money

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## This note was uploaded on 03/24/2011 for the course ECON 103 taught by Professor Lin during the Summer '08 term at Rutgers.

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sumassign8 - 1 Intro Macro Assignment 8 N Sheflin NOTES The...

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