• Join over 1.2 million students every month
• Accelerate your learning by 29%
• Unlimited access from just £6.99 per month
Page
1. 1
1
2. 2
2
3. 3
3
4. 4
4
5. 5
5
6. 6
6
7. 7
7

# Compare the Classical and Keynesian models, making the reference to,a) The labour market, b) The AS curve, c) The AD curve, d) The relationship between real and monetary variables.

Extracts from this document...

Introduction

Compare the Classical and Keynesian models, making the reference to a) The labour market b) The AS curve c) The AD curve d) The relationship between real and monetary variables. 1st lecture until 08/10/03 Plan Classical a) The labour market b) The AS curve c) The AD curve d) The relationship between real and monetary variables. Keynesian a) The labour market b) The AS curve c) The AD curve d) The relationship between real and monetary variables. Introduction Classical economics uses the fallacy of composition to aggregate individual components. It believes that microeconomic foundations are necessary. However, in contrast, Keynesian economists believe the behaviour of the whole economy to be different from the behaviour of individual components acting individually. It believes the whole economy has its own identity and therefore requires n a new theory. Keynesians believe, that by itself the economy may not produce optimum outcome and therefore government intervention is needed. Classical Useful because * Background to Keynesian revolution * Basis for new-classical models Based upon * Say's law of markets (supply causes demand) ...read more.

Middle

0 at equilibrium point A. * In the aggregate, DN = DS * Equilibrium employment = N0 Model d) * Determines equilibrium aggregate output at O*. In the classical model, aggregate supply always determines real output, due to the vertical AS curve. * Output can change due to changes in o Real choices o Technological conditions The above diagrams show Classical Derivation of AS from a perfectly flexible labour market. If price increases, wage increases in the competitive market to keep w/p constant. Therefore the AS curve is vertical. Conversely, if price level falls, the wage falls. Output is invariant (perfectly inelastic) with respect to price level, as with an equilibrium level of real wage (w/p), any change in price level is offset by a change in wages to maintain w/p. Aggregate Demand-Monetary side Sm is fixed exogenously (externally) by monetary authority Sm and Dm-----the quantity theory-----2 versions: Fisher: M V = P T VELOCITY DETERMINED - CLASSICAL M=money stock V=Velocity of circulation P=average level of P T=output of goods and services Cambridge: Md = kPY DEMAND DETERMINED - KEYNESIAN k=proportion of nominal income KEYNESIAN Labour market Unlike classical, ...read more.

Conclusion

Keynes spoke of the point of effective demand (POED) where AD=AS. Given this, we can say that Keynesian AD is a point on the Keynesian AS curve, and is determined by (in a closed, laissez faire market): Y = C + I where C = f(Y) I = f (r, mec) mec = marginal efficiency of capital, determined by supply price and perspective yield r = interest rate, determined by LP (liquidity preference) and M (demand for money). With a given p and expectations (taking mec out of the equation), Keynes AD is determined by r and Y, and is expressed in equilibrium terms (goods market and monetary market) in the IS-LM. Conclusion In the Classical model, due to the vertical AS curve, supply alone determines real output. In the Keynesian model, both supply and demand factors affect real output. In the Classical model, the position of the AD curve is determined by purely monetary variables (the role of demand was to determine p), whereas in the Keynesian model, both monetary and real variables determine its position. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Applied Economics section.

## Found what you're looking for?

• Start learning 29% faster today
• 150,000+ documents available
• Just £6.99 a month

Not the one? Search for your essay title...
• Join over 1.2 million students every month
• Accelerate your learning by 29%
• Unlimited access from just £6.99 per month

# Related University Degree Applied Economics essays

1. ## Introductory econometrics assignment. The reasons for creating these two relative price variables is to ...

4 star(s)

= [8.344072, 12.52782] + 90*[-0.078989,-0.045364] +75*[-0.000618, 0.028966] +75*[0.001682, 0.041262] = [8.344072, 12.52782] + [-7.10901, -4.08276] + [-0.04635, 2.17245] + [0.12615, 3.09465] = [1.314862, 13.71216] The results indicate that one unit increase in PR1, PR2 andPR3 together will change SAL1 by between 1.315% and 13.712%.

2. ## British Grocery Market-market structurre, supply &amp;amp; demand curves &amp;amp; economies of scale

In Tesco case, the company would prevail more with inelastic prices of demand. How could Tesco increase the inelasticity of demand for its products? Making goods repellent , distasteful , unattractive, ugly, making the products difficult to buy. The result is the increase of the inelasticity of demand.

1. ## Econometrics Case Study. The main objective of this project is to apply the econometrics ...

the process .But it will be incomplete if we didn't set our Objective and Goals : Estimated Result and Analysis Description of Data: After selecting our data from Dubai financial market the .We are going to have a look on the relationship between the variables that we have been chosen,

2. ## Why are some markets more competitive than others?

in the future, then market entry is less likely due to the high risk associated with failure. Such sunk costs create a barrier to exit. Markets where existing firms benefit from substantial economies of scale, a new company will need to be of similar size in order to compete on an equal footing.

1. ## Cross Elasticities of Demand

Within a given market, the income elasticity of demand for various products can vary and of course the perception of a product must differ from consumer to consumer. The important market for overseas holidays is a great example to develop further in this respect.

2. ## The dotcom bubble and the stock market fall in 2000-2001

The index reflects the performance of stocks of technology companies and growth companies. From January 1994 to February 2000, the it rose from 776.80 to 4,696.69, a 605% increase, and was influenced mainly by prices of high-technology stocks. But these expectations turned out to be far too positive.

1. ## An Empirical Investigation into the Relationship between Investment and Economic Output / Growth

For the years 1970-2004 we obtained data from the Penn World Tables (PWT)3 for the following variables in Greece: * Population (000s) - POP * Real Gross Domestic Product per Capita (\$) - cgdp * Investment Share of cgdp (%)

2. ## Climate Change And Economic Policy. An Australian Perspective

There is also the added cost of administration fees and loss of investment due to higher costs. Other costs that may be included are changes in capital. Pigovian taxes are aimed to have a distortion effect, decreasing the amount of CO2 emitted, changing what firms use to produce and furthermore

• Over 160,000 pieces
of student written work
• Annotated by
experienced teachers
• Ideas and feedback to