LectureCh7 - The Classical Long-Run Model Economists...

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Unformatted text preview: The Classical Long-Run Model Economists sometimes disagree with each other Actually much more agreement exists among economists than there appears to be Once distinction between long-run and short-run becomes clear Many apparent disagreements among macroeconomists dissolve If no time horizon is specified, however, an economist is likely to focus on horizon he or she feels is most important Something about which economists sometimes do disagree The Classical Long-Run Model Ideally, we would like our economy to do well in both long-run and short-run Unfortunately, there is often a trade-off between these two goals Doing better in short-run can require some sacrifice of long-run goals, and vice versa Policies that can help us smooth out economic fluctuations may prove harmful to growth in the long-run While policies that promise a high rate of growth might require us to put up with more severe fluctuations in short-run Macroeconomic Models: Classical Verses Keynesian Classical model, developed by economists in 19th and early 20th centuries, was an attempt to explain a key observation about economy Over periods of several years or longer, economy performs rather well If we think in terms of decades rather than years or quarters, business cycle fades in significance In the classical view, this behavior is no accident Powerful forces are at work that drive economy towards full employment An important group of macroeconomists continues to believe that classical model is useful even in shorter run In 1936, in midst of Great Depression, British economist John Maynard Keynes offered an explanation for economys poor performance Argued that, while classical model might explain economys operation in long-run, long-run could be a very long time in arriving Macroeconomic Models: Classical Verses Keynesian Keynesian ideas became increasingly popular in universities and government agencies during 1940s and 1950s By mid-1960s, entire profession had been won over Macroeconomics was Keynesian economics Classical model was removed from virtually all introductory economics textbooks Classical model is still important In recent decades there has been an active counterrevolution against Keyness approach to understanding the macroeconomy Useful in understanding economy over long-run While Keyness ideas and their further development help us understand economic fluctuationsmovements in output around its long-run trend Classical model has proven more useful in explaining the long-run trend itself Assumptions of the Classical Model...
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LectureCh7 - The Classical Long-Run Model Economists...

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