420 Macroeconomic Model Summary

420 Macroeconomic Model Summary - Macroeconomic Model...

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Macroeconomic Model Summary 00:07 Classical Model Output:  Output is completely determined by supply side factors. This view is embodied in the  vertical aggregate supply schedule Increase in AD  cause the  price level to rise, which increases output.  The role of AD is to determine  the price level.  Labor: Labor Supply  and  demand  depend only on the real wage, which is  KNOWN  to all  market participants.  The  money wage  is perfectly flexible and moves to equate demand and supply in the  labor markets.  To clear the labor Market,  the  money wage  has to  rise proportionately with the  price level.  Causing the real wage to stay  unchanged  in the new equilibrium. Money: The AD is an implicit theory based on the  quantity theory of money . (Relationship  between quantity of money and nominal income) Cambridge: M = kPY With k constant, changes in the quantity of money result in proportional changes in  nominal income (PY). With real income (Y) fixed,  the full adjustment comes in prices.
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Classical model has a monetary theory of Aggregate Demand RBC:  (Modern Version of Classical Theory) Output:  Like Classical,  output  and  employment  are determined by  real variables.  Labor: The  labor market  is  ALWAYS in equilibrium;  all unemployment is voluntary. Money:
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420 Macroeconomic Model Summary - Macroeconomic Model...

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