Macro HW 3 - Homework 3 1. The main differences between the...

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Homework 3 1. The main differences between the classical and Keynesian models are those dealing with unemployment and wages. In the classical model unemployment is optional and thus they are always at the NAIRU or the natural rate of unemployment. In this model the only people that don’t work are the ones that choose not to because they are unhappy with the wage that is given. This is in strict contrast to the Keynesian model who says that unemployment is determined by the amount of aggregate demand. This is because in the Keynesian model people will lose their job based upon the level of demand of their product/service. The other difference is that of wages; in a classical model the wages are flexible as opposed to that of the Keynesian model in which wages are sticky. Flexible wages mean that any time there is a major change in output or in prices the firms will adjust the wages of the workers to still remain at the equilibrium. However, in the Keynesian model the wages are sticky and as such cannot be adjusted at any time until, for whatever reason, they become unstuck. This means that when there is a major change in wither price or output the firm must either fire or hire people and cannot simply tamper with the wages. 2. As an aggregate demand curve goes up so to does price, and as such the AD goes down. This is due to the fact that as price goes up the real value of monetary wealth falls and as a result AD will die down. The less your money is worth the less disposable income people had and thus the less amount of consumption will occur. In a single good demand curve as the demand curve goes up so does price but in this context we must view the item based upon its elasticity. If the item becomes expensive then the consumer
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will simply find a comparable item or a substitute of a lower price and consume that. Aggregate demand takes into account all the items within a country while a single item
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Macro HW 3 - Homework 3 1. The main differences between the...

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