Midterm two Friday April 19 Part 3 of Syllabus and classical model Chapters 5 8 W Real line rate W Nominal wage rate price level P Price Level L Quantity of Labor Macroeconomic Models 1 Classical Model 2 Keynesian Model 3 Aggregate Demand Aggregate Supply Classical Model Dominant before Great Depression Resurgence in 1980 s Supply Side Economics Faith in Markets Self Adjusting Mechanisms Little role for government nominal variables 4 Law of Diminishing Returns Building the Model 1 Prediction Function Y Real GDP P Price Level PY Nominal GDP L Labor K Capital W Real Wage Classical Model Assumptions 1 Rational self interest Firms maximize profits maximize utilities as well 2 Wages prices and interest rates are flexible so that market is always clear 3 No Money illusion Economic decisions are based on real variables not
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