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

Ratios, How to find fixed costs for capacity ratio calculating from annual ...

How to find fixed costs for capacity ratio calculating from annual report?

How are firms doing at the equilibrium price, Perfect Competition. a.  W...

Perfect Competition. a.  What does it mean for a market to be perfectly competitive?  What are the three conditions of perfect competition.  What does it mean for firms to be 'p

Influx of foreign labor, If a nation were to experience an influx of foreig...

If a nation were to experience an influx of foreign labor into the market for corn production, the production possibilities frontier for the nation would: a. shift inward due to

Negative performances of the economy, An advantage of observing statistics ...

An advantage of observing statistics from this range is that it encapsulates both positive and negative performances of the economy helping to produce a much more accurate insight

Kernel density estimator to plot the two densities, The data is posted on B...

The data is posted on Blackboard. Download the data lfs4.dta on your personal computer. This data is from the Labour Force Survey 2003. In STATA, add enough memory to open the data

Employment, critically analyse the ways at which the government of zimbzbwe...

critically analyse the ways at which the government of zimbzbwe has put in place to address unequal employment opportunities between men and women

Inflation, discuss the action the procurement function should take to achie...

discuss the action the procurement function should take to achieve raw materials at economic cost durin inflation

Assignment, explain the profit maximizing/loss minimizing rule may be appli...

explain the profit maximizing/loss minimizing rule may be applied under the 3 scenarios

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