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

Explain about IS-LM-model, Q. Explain about IS-LM-model? The key differ...

Q. Explain about IS-LM-model? The key difference between the IS-LM model and the cross model is that nominal interest rate is exogenous in cross model on the other handit is en

Explain the term unit labor costs, An article published in Die Zeit on 25 M...

An article published in Die Zeit on 25 March 2010 analyses the German policy that allows for only moderate increases in wages. According to this article, the unit labor costs in Ge

Free trade help the u.s. economy, Why and how does free trade help the U.S....

Why and how does free trade help the U.S. economy? How might free trade hurt the U.S. economy?

Net present worth for this new computer system, Kermit is considering purch...

Kermit is considering purchasing a new computer system. The purchase price is $106,430. Kermit will borrow one-fourth of the purchase price from a bank at 10 percent per year compo

Demand for the hotel''s rooms, Suppose that a particular large hotel has 79...

Suppose that a particular large hotel has 790 rooms. Furthermore, suppose that the demand for the hotel's rooms are normally distributed with a mean demand of 733 rooms with a stan

Calculate the total cost and minimum cost, Consider a hospital that produce...

Consider a hospital that produces output (Q) and has two production inputs, nurse-hours (N) and beds (B). the hospital faces input costs of W N = 15 and W B = 25. Assume the h

Consumer Price Index, What is the formula for consumer price index?

What is the formula for consumer price index?

Interest rates with different maturities, Including different interest rate...

Including different interest rates with different maturities would complicate the models however it wouldn't buy you very much. Because interest rates with different maturities are

Effectiveness of commercials, Suppose an advertising agency is conducting a...

Suppose an advertising agency is conducting a survey concerning the effectiveness of commercials during the Super Bowl. If 32% of people watch the Super Bowl, and if the agency con

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