theclassicalmodel.pptVIP

Observe the real and monetary consequences of an increase in capital of the labor-using variety. And we’ll keep track of the nominal wage rage. S D K = K0 K = K1 Y/P = Q N N W/P P Q THE CLASSICAL MODEL (Y/P)N (Y/P)N (MV)0 (MV)0 P W ω ω’ 1 1 ω = * THE CLASSICAL MODEL How Classical is it? Gardner Ackley Macroeconomic Theory 1961 INCOME OUTPUT and EMPLOYMENT CONSUMPTION SPENDING INVESTMENT SPENDING PRICE LEVEL INCOME OUTPUT and EMPLOYMENT CONSUMPTION SPENDING INVESTMENT SPENDING PRICE LEVEL Short-Run Movements Long-Run Movements INCOME OUTPUT and EMPLOYMENT CONSUMPTION SPENDING INVESTMENT SPENDING PRICE LEVEL Medium-Run Movements B U S I N E S S C Y C L E T H E O R Y T H E O R Y O F E C O N O M I C G R O W T H U N E X P L O R E D T E R R I T O R Y Macroeconomics did not exist before Keynes. Keynesian Macroeconomics did not exist before Keynes. Really??? Gardner Ackley Adam Smith A 1770s kind of guy. A 1960s kind of guy. CLASSICAL ECONOMNICS Adam Smith (1723 – 1790) The Wealth of Nations, 1776 David Ricardo (1772 – 1823) On the Principles of Political Economy and Taxation, 1817 John Stuart Mill (1806 – 1873) Principles of Political Economy, 1848 TEXTBOOK CLASSICISM Gardner Ackley (1915 – 1998) Macroeconomic Theory, 1961 Chairman of the Council of Economic Advisors during the Johnson Administration (1964 – 1968) TEXTBOOK CLASSICISM Refers to all economists up to but not including Keynes. Takes a (mostly) short-run view. Treats capital as parametric and doesn’t deal with growth. Assumes that markets work “perfectly.” Assumes away all problems of pervasive unemployment. Allows for changes in the functional distribution of income. Separates monetary issues from relative-price issues. CLASSICAL ECONOMICS Refers to the writings of Adam Smith through J. S. Mill. Takes a long-run view. Focuses on capital accumulation and economic growth. Illuminates the nature of mark