assign9 - 1 Intro Macro N. Sheflin Assignment 9 NOTES The...

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1 I n t r o M a c r o N . S h e f l i n Assignment 9 NOTES The Long-Run/Classical Model– due by THURSDAY 3/25 (this is the only time hw is due on Thursday rather than Monday). Investment Game – Round 2 – due by THURSDAY 3/25 Careers in class READING 15A, 17B, 10C (exclude open economy) – in that order (for the 18 th edition, chapter 33 9of the combined text)- Unemployment, roughly corresponds to chapter 15 of the 19 th macro edition (Unemp and the Foundations of Aggregate Supply) and chapter 33 of the 18 th “The Warring Schools. .” roughly corresponds to chapters 17B and 10C) And: also http://www.bized.co.uk/virtual/economy/library/theory/ -- read the material on classical/neo-classical economics and monetarism and Keynesianism and Keynes (bio, work, theories) and Friedman (bio, work, theories – but STOP at the inflation augmented Phillips curve which we will read next week) And the master at http://homepage.newschool.edu/het//texts/keynes/gtcont.htm Read the Preface, Chapter 1 and maybe, Chapter 3 (tougher) KEY POINTS 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 impacted only the price level and inflation, not real variables like output, unemployment, real wages, etc. Under the forces of supply and demand, economic downturns would correct themselves with no need for monetary or fiscal policy. If aggregate demand fell (as in 1929), prices would eventually fall, restoring full employment equilibrium. Fiscal policy would be counter-productive with full crowding out of investment, and expansionary monetary policy would only increase prices and inflation. 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 (and technology and raw material costs) 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 (i.e. vertical aggregate supply curve) – since increases in price I nthe long-run increase both the demand for labor but reduce the supply and these cancel out. With no additional labor, output doesn’t change with changes in price 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)
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assign9 - 1 Intro Macro N. Sheflin Assignment 9 NOTES The...

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