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

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1 Intro Macro N. Sheflin Assignment 9 NOTES The Long-Run/Classical Model and the Evolution of Macroeconomics Investment Game – Round 3 and Career advisement READING 15A, 17B, 10C (exclude open economy) – in that order 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 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) Price level determined by Money Supply ONLY o Classical Dichotomy says M affects price level and NOMINAL Variables only s Real variables determined by real factors Policy o Not needed since self-regulating economy tending to full employment o Fiscal Policy – not needed, no effect due to complete crowding out
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This document was uploaded on 10/25/2011 for the course ECONOMICS 01:220:103 at Rutgers.

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

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