10-01-12c (2)

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

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Unformatted text preview: T wo M odes Of Analysis • The Classical M odel Assumes That All Pr ices (I ncluding The Pr ice Of L abor —The W age Rat e) Ar e Fully Flexible. • The K eynesian M odel Assumes That Pr ices A r e Given I n The Shor t Run, And That The M ar ket -Clear ing Equat ion For The L abor M ar ket Can Be I gnor ed. • The Value Of The Pr ice L evel I n The Shor t Run I s Chosen As P = 2.7 (So That I t s N at ur al L ogar it hmic Value, p, I s Equal t o 1.) L M mst =5,p=1 r Y d, I S Y s, FE L M ’mst =5.1,p=1 re LM”mst=5.1,p=1.1 Y0 Y 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. L M md0=3.2,p=1 r Y d, I S Y s, FE L M ’md0=3.1,p=1 re LM”md0=3.1,p=1.1 Y0 Y This figure shows “monetary near-neutrality.” The shift (portrayed by the red arrows) of the LM curve from its blue position to the gold position, caused by a DECREASE in money demand 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 (except for money holdings) are unchanged in value. L M md0=3.2,mst =5 r Y d, I S Y s, FE L M ’md0=3.1,mst =5 re LM”md0=3.1,mst=4.9 Y0 Y This figure shows “monetary near-neutrality.” The shift (portrayed by the red arrows) of the LM curve from its blue position to the gold position, caused by a DECREASE in money demand of .1, is accommodated by a reduction in the money supply of .1, which shifts LM back (green arrows) to its original position and all real variables (except for money holdings) are unchanged in value. ...
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This note was uploaded on 07/16/2011 for the course ECON 2154 taught by Professor Boyer during the Winter '10 term at UWO.

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

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