Ch07-8e_macro

Ch07-8e_macro - CHAPTER 7 At Full Employment: The Classical...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
At Full Employment: The Classical Model CHAPTER 7
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 After studying this chapter you will be able to Explain the purpose of the classical model Describe the relationship between the quantity of labor employed and real GDP Explain what determines the full-employment level of employment and real wage rate and potential GDP Explain what determines unemployment when the economy is at full employment
Background image of page 2
3 After studying this chapter you will be able to Explain how borrowing and lending decisions interact to determine the real interest rate, saving, and investment Apply the classical model to explain changes and international differences in potential GDP and the standard of living
Background image of page 3

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

View Full DocumentRight Arrow Icon
Our Economy’s Compass –What is the economy’s compass? –What are the forces that prevent the economy from straying too far from full employment? –What determines the level of unemployment at full employment? –What determines employment, the real wage rate, and the real interest rate when the economy is at full employment?
Background image of page 4
The Classical Model: A Preview To understand macroeconomic performance, economists distinguish between real variables and nominal variables. Real variables measure quantities that tell us what is happening to economic well-being—real GDP, employment and unemployment, the real wage rate, consumption, saving, investment, and the real interest rate. Nominal variables measure objects that tell us how dollar values and the cost of living are changing—the price level, the inflation rate, nominal GDP, nominal wage rate, and the nominal interest rate.
Background image of page 5

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

View Full DocumentRight Arrow Icon
The Classical Model: A Preview The separation of macroeconomic performance into a real part and a nominal part is the basis of the classical dichotomy. The classical dichotomy states: At full employment, the forces that determine real variables are independent of those that determine nominal variables. The classical model is a model of an economy that determines the real variables.
Background image of page 6
Real GDP and Employment To produce more real GDP, we must use more labor or more capital or develop technologies that are more productive. It takes time to change the quantity of capital and develop new technologies, so to change real GDP quickly, we must change the quantity of labor. What is the relationship between the quantity of labor employed and real GDP?
Background image of page 7

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

View Full DocumentRight Arrow Icon
Real GDP and Employment Production Possibilities The production possibility frontier ( PPF ) is the boundary between those combinations of goods and services that can be produced and those that cannot. To study the relationship between the quantity of labor employed and real GDP, we begin with a special PPF : one that shows the boundary between leisure and real GDP.
Background image of page 8
Figure 7.1(a) illustrates a PPF between leisure and real GDP. Time can be allocated to
Background image of page 9

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

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/12/2011 for the course ECON 1101 taught by Professor Rappoport during the Fall '08 term at Temple.

Page1 / 55

Ch07-8e_macro - CHAPTER 7 At Full Employment: The Classical...

This preview shows document pages 1 - 10. Sign up to view the full document.

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