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

Millions of americans purchase, Each day millions of Americans purchase mil...

Each day millions of Americans purchase millions of goods and services. These goods and services are generally readily available, as long as you have the necessary money to purchas

Money supply, does central bank determine money supply in the economy

does central bank determine money supply in the economy

Debate between New Classical and New Keynesian economics?, Debate between N...

Debate between New Classical and New Keynesian economics?

What is labor market, Q. What is Labor Market? Labor market in the IS-L...

Q. What is Labor Market? Labor market in the IS-LM model is the same as in cross model. Hence the IS-LM model is only applicable if profit-maximizing quantity of L would result

Classical economic theory, Between 2007 and 2009 the U.S. economy experienc...

Between 2007 and 2009 the U.S. economy experienced a severe recession. In an effort to stimulate the economy, the federal government passed a stimulus package. Explain the federal

Block exogeneity test, From Tables 3A to 3F in the Appendix the results fro...

From Tables 3A to 3F in the Appendix the results from VAR/Block Exogeneity Granger Causality Test are that the oil price variable does Granger cause both Inflation and interest rat

Descriptive statistics from the data, Table below shows the descriptive sta...

Table below shows the descriptive statistics which have been condensed from the data sheet for the period 1987 Q4 to 2011 Q3.   GDP (%) Real Exchan

Traditional or a roth ira, Suppose one of your clients is four years away f...

Suppose one of your clients is four years away from retirement and has only $1,500 in pretax income to devote to either a Roth or a traditional IRA. The traditional IRA permits inv

Economic performance, This 24 year 1 quarter period should offer sufficient...

This 24 year 1 quarter period should offer sufficient insight into the short term and long term correlation between the variables. Figure - A graph showing the trend of

Steady state in solow model, conditions for steady state in solow model.in ...

conditions for steady state in solow model.in what respects is golden rule different from steady state?

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