Classical model and the long-term phillips curve, Macroeconomics

Assignment Help:

Q. Classical model and the long-term Phillips curve?

In classical model, L and real wage are determined from equilibrium conditions in the labor market. L and W/P, hence, are only affected by marginal product of labor (that determines the demand for labor) and by utility function of the employees (that determines the supply of labor). All unemployment is voluntary and L, U or W / P are all affected by exogenous variables only. 

In classical model, inflation is determined solely by the growth in money supply pM. From the quantity theory of money, M·V = P·Y and if growth rate of M is pM, then P should increase by the same rate as V and Y are constant. From quantity theory we can determine that p = pM must hold.

Relationship M·V = P·Y is therefore sometimes known as quantity theory in levels whereas p = pM is called the quantity theory in rates. 

In classical model, inflation is balanced and pW = p (real wage is constant). Because p = pM, we have p = pM = pW. As U isn't affected by any endogenous variables, there is no relationship between pWoch U in classical model and vertical LPC applies even in the short run. The position on LPC determined by pM.

Unlike neo-classical synthesis, where economy temporarily may depart from LPC, economy should always be on the LPC in the classical model.


Related Discussions:- Classical model and the long-term phillips curve

Monetary policy, Let us now see a bit more closely how monetary policy work...

Let us now see a bit more closely how monetary policy works. See Figure Figure  The initial equilibrium at point E is on the initial LM schedule that corresponds to a

Demand and supply, Suppose the demand and supply for milk is described by t...

Suppose the demand and supply for milk is described by the following equations Qd=600-100P; Qs=-150+150P Where P is the price in rand, Qd is the quantity demanded in millions of l

Solve equilibrium price and the equilibrium quantity, Suppose that a widget...

Suppose that a widget market is described by the following supply and demand equations. Supply: Q = 3 P Demand: Q =400 - P a. Solve for the equilibrium price and the

State in detail the macroeconomic policy, State the macroeconomic policy ...

State the macroeconomic policy The view that macroeconomic policy must only focus on supply-side performance of economy and should ignore management of the demand side is an ex

What do learn by study of the supply curve concepts, What do learn by study...

What do learn by study the supply curve concepts? a. The relationship in between quantity of inputs and output b. Why production is frequently subject to reducing  returns

Economic theory helps society, Do you agee or disagree " Economic theory he...

Do you agee or disagree " Economic theory helps society reach economic goals that it has selected for itself?" Justify your answer.

Homework, Potatoes cost Janice $0.50 per pound, and she has $5.00 that she ...

Potatoes cost Janice $0.50 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. Suppose she feels that the first pound of potatoes is worth $1.50,

Crowding out would most likely occur, Crowding out would most likely occur ...

Crowding out would most likely occur when: A. the Congress enacts budget cuts to balance the budget. B. workers lose jobs as a result of anti-inflationary fiscal policies. C. the f

Estimate the value of wacc method, You can work on this assignment individu...

You can work on this assignment individually or in a group of up to 4 people.  If you choose to work as a group, your group should hand in one assignment and you will all receive t

Kuhn tucker conditions and utility function, 1. Kuhn - Tucker Conditions ...

1. Kuhn - Tucker Conditions  Max 2x + 3y  s.t. pxX + pyY ≤ M. x ≥ 0, y ≥ 0 2. Max (8 + x)(8 + y)  s.t. pxX + pyY ≤ M. x ≥ 0, y ≥ 0 Utility function 3. U(x, y)

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd