ECON 305 - classical model

ECON 305 - classical model - The economy in this model is...

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Writing Assignment 1 Classical Model: Closed Economy This article is describes the recent interactions between the United States Congress and the Chairman of the Federal Reserve. The Fed is designed in a way that leaves it quite independent of the political process and thus immune to the political business cycle. As of late, Congress has repeatedly attempted to influence the policies of the Fed with letters warning of economic instability and congressional hearings. The article includes descriptions of some of the Feds recent open market operations and their other attempts to influence inflation and improve the economy. According to the Classical Model: Closed Economy, output is fixed and any alteration in government, consumer spending, or investment has no effect on Gross Domestic Product (GDP). Using this model we can conclude that the political squabbling and attempts to alter the Feds plans for the economy will have no effect on long run GDP.
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Unformatted text preview: The economy in this model is operating at full employment of labor and resources and would be at a point on the very edge of their production possibilities frontier. Output is maximized and fixed so any shift in one in the three variables will be compensated for by another variable. In the long run, the Feds attempts to influence GDP will have no effect and the political discourse only serves to determine who gets what. However, this is a very inadequate model to use while describing the short run effects of the Feds decisions. Our economy does not operate “in Nirvana” and is open to world trade, which makes it a poor candidate for an evaluation by the Classical Model. The variables that the Fed and congress must take into account with decisions of this size are incredibly vast and should not be scrutinized by such a simple economic model....
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