CLASSICALCLASS

CLASSICALCLASS - Classical/Monetarist LR Model Full...

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1 1 Classical/Monetarist LR Model b Full employment Output in LR-Say’s Law s Self-adjusting economy s Vertical agg S curve at natural rate of unemployment/ natural rate level of output b Fiscal Policy – no (and probably bad) s Complete crowding out G up I down – no stimulus b Just composition C versus I (and growth) s Not needed – self-regulating - full emp. b Monetary Policy –P only s M->P only thru Quantity Theory of Money s Classical Dichotomy/ Neutrality of money b Real factors determine real variables s K,L->y,Unemp (natural rate of unemployment,y) s Loanable Funds Theory b s Classical Dichotomy – Neutrality of Money b M->P and nominal int rate, nom W NOT real vars Krugman gt / friedman inflation causes/ de long p curve 2 In the News? 3 Course Issues b Midterm Weds b EC-Greg Ip Little Book of Economics
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2 4 Quick Keynesian Review 5 Keynes versus the Classics s The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. b - John Maynard Keynes , A Tract on Monetary Reform (1923) Ch. 3 [2 6 What Determines The Level Of Output In The Long-run? A. B. Prices C. Fiscal and monetary policy D. Capital and Labor given technology E. Money supply
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3 7 Why? s Say’s Law S->D b What about S not = I? s Loanable Funds Theory b ->ireal and thus S=I at full employment s Flexible Wages and Prices b price rather than output adjustment s Quantity Theory of Money MV=Py b M->P only since V const and y at fe 8 Say What? s Economy tends to full employment b potential gdp=natural rate level of output LR s No ‘general glut’–if you produce it they will buy it b Can’t have too little agg demand b desired I=S always – loanable funds theory s Real forces of productivity, amount of capital, labor force determine output s Business Cycle Fluctuations temporary b automatic adjustment thru price s No need for policy, and of no use 9 Loanable Funds Theory – real int s Supply and Demand for loanable funds b Savings and Investment determine the real interest rate b Hence desired S= desired I always (at full employment) b More next week
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CLASSICALCLASS - Classical/Monetarist LR Model Full...

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