classicalmodel.ppt

The Classical Long-Run Model The classical model explains the long term performance of the economy. Ideally we would like one model to explain both the long and the short run behavior of the economy. But there are several features of the classical model which are only true in the long run. The Classical Long-Run Model Ideally, we would like our economy to do well in both long-run and short-run Unfortunately, there is often a trade-off between these two goals Doing better in short-run can require some sacrifice of long-run goals, and vice versa Polices that can help us smooth out economic fluctuations may prove harmful to growth in the long-run While policies that promise a high rate of growth might require us to put up with more severe fluctuations in short-run Macroeconomic Models: Classical Verses Keynesian Classical model, developed by economists in 19th and early 20th centuries, was an attempt to explain a key observation about economy Over periods of several years or longer, economy performs rather well If we think in terms of decades rather than years or quarters, business cycle fades in significance In the classical view, this behavior is no accident Powerful forces are at work that drive economy towards full employment Macroeconomic Models: Classical vs. Keynesian Classical Model could not explain the Great Depression Sustained unemployment and low output. Why did the economy not correct itself, as the classicals believed? In 1936, British economist John Maynard Keynes offered an explanation While the classical model might explain economy’s operation in the long-run, the long-run could be a very long time in coming Macroeconomic Models: Classical Verses Keynesian Keynesian ideas became increasingly popular in universities and government agencies during 1940s and 1950s By mid-1960s, entire profession had been won over Macroeconomics was Keynesian economics Ten years later however, the Keynesian prescriptions did not seem to work Classical model is sti