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10-01-12c (2) - T wo M odes Of Analysis The Classical M...

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Two Modes Of Analysis The Classical Model Assumes That All Prices (Including The Price Of Labor—The Wage Rate) Are Fully Flexible. The Keynesian Model Assumes That Prices Are Given In The Short Run, And That The Market-Clearing Equation For The Labor Market Can Be Ignored. The Value Of The Price Level In The Short Run Is Chosen As P = 2.7 (So That Its Natural Logarithmic Value, p, Is Equal to 1.)
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r Y Y d , IS LM’ mst=5.1,p=1 Y s , FE Y 0 r e LM mst=5,p=1 LM” mst=5.1,p=1.1 This figure shows “monetary neutrality.” The shift (portrayed by the red arrows) of the LM curve from its blue position to the gold position, caused by a RISE in the money supply of .1, is offset by a rise in the price level of .1, which shifts LM back (green arrows) to its original position and all real variables are unchanged in value.
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r Y Y d , IS LM’ md0=3.1,p=1 Y s , FE Y 0 r e LM md0=3.2,p=1 LM” md0=3.1,p=1.1 This figure shows “monetary near-neutrality.”
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