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.

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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.

st 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)

* Quantity theory of money (money supply causes price level)
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Implies

* If there is wage price flexibility then the economy quickly adjusts to voluntary full employment equilibrium

* Supply causes demand, therefore, concentrate on supply

* Direction of causation is from the labour market to aggregate supply

REAL SIDE

MONETARY SIDE

AS Aggregate Supply

AD Aggregate demand

w/p Real wage

w money wage

O Output/real income

p price level

N Employment

Classical Labour market demand and Aggregate Supply

Labour market demand

DN = firms demand for labour

MPP = marginal physical ...

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