Lecture Notes Days 5- 6. Flaws in Classical Model and Keynsian Model

Lecture Notes Days 5- 6. Flaws in Classical Model and Keynsian Model

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Day 5: Classical Versus Keynesian Model Classical Model: Adam Smith, David Ricardo, John Stuart Mill… Capitalist economy generates its own auto-pilot: disturbances set up the conditions of their own recovery, as all the markets work together. Calls for a Laissez-faire policy. Ex: Not enough saving? Price of capital (interest rate) increases and more people save Ex: too much stuff? Prices fall, consumption increases Ex: Unemployment? Wages fall until employers would hire more people, fewer people want to work Whoops: Great Depression: Prices fell, inventories increased (gluts) Wages fell, unemployment increased Aspects of the Classical Model: Quantity Theory of Money: MV = PQ M = money stock in economy V = income velocity of money (turnover) P = price level Q = level of real national income (real GDP) True by definition Argued that V and Q are determined by external institutional factors; thus are constant: _ _ MV = PQ Thus, increasing M simply leads to increases in P – inflation! Changing Money (monetary policy) can’t expand economy…only production, and the labor market, can The goods and labor markets Equilibrium determined by the demand and supply of labor. Increase in the demand for labor increase output. Wages determine who will work and labor supply = labor demand…full employment. If you won’t work at the given wage, you are not unemployed. If wages are flexile, no unemployment. Leads to equilibrium in goods. Equilibrium: A state of balance in which there are no internal pressures for change. A market is in equilibrium when quantity demanded = quantity supplied; prices make the adjustments. Price Quantity Equilibrium Price Demand Supply
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Say’s Law French Economist John Baptiste Say “supply creates it’s own demand”
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern