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Classical models of_the_macroeconomy


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Classical models of_the_macroeconomy

  1. 1. Upper Six Unit 2 Module 1 Topic 2
  2. 3. Types of Unemployment <ul><li>Frictional </li></ul><ul><li>Structural </li></ul><ul><li>Cyclical </li></ul><ul><li>Voluntary </li></ul><ul><li>Normal </li></ul><ul><li>Residual </li></ul><ul><li>Seasonal </li></ul>
  3. 4. Classical Model <ul><li>Unemployment is a result of wages being too high </li></ul><ul><li>Employers will not employ workers requiring wages above equilibrium level </li></ul><ul><li>The demand for labour in the economy is a function of the marginal physical product of labour </li></ul><ul><li>MPP decreases as more workers enter the labour market </li></ul><ul><li>The supply of labour increases as wages rise </li></ul>
  4. 5. Quantity of labour Real Wage D L S L Unemployed 0 L2 L1 L3 W/P1 W/P2
  5. 6. Aggregate Demand <ul><li>Total spending on goods and services in an economy </li></ul><ul><li>C + I + G + (X – M) </li></ul><ul><li>Curve </li></ul>
  6. 7. C+I+G+(X-M) <ul><li>Consumer spending – amount consumers spend on goods, dependent on level of disposable income </li></ul><ul><li>Investment spending – expenditure by private sector on capital goods, affected by interest rates, technological change, expectations </li></ul><ul><li>Government spending – current and capital spending on public services </li></ul><ul><li>Net Exports – difference between exports and imports </li></ul>
  7. 8. AD Curve AD AD Real GDP Price level <ul><li>Slopes downward from left to right because a lower price will: </li></ul><ul><li>Raise demand for net exports </li></ul><ul><li>Increase purchasing power of households </li></ul><ul><li>Encourage bank lending </li></ul><ul><li>Movement along curve </li></ul>AD2 AD2 <ul><li>If any of the components of AD change for a reason other than price it will result in a shift. This could result due to: </li></ul><ul><li>A rise in expectations about the future </li></ul><ul><li>A cut in direct tax </li></ul><ul><li>An increase in the money supply </li></ul><ul><li>A fall in the exchange rate </li></ul><ul><li>A rise in the quality of domestic goods </li></ul>
  8. 9. Aggregate Supply <ul><li>Total output that firms in an economy are willing and able to supply at different price levels in a given period of time </li></ul><ul><li>SRAS </li></ul><ul><li>LRAS </li></ul>
  9. 10. Short run Aggregate Supply <ul><li>Slopes upwards from left to right – higher prices mean ability to meet costs and greater profits </li></ul><ul><li>Shifts if productivity changes or payments to fop change </li></ul>
  10. 11. Long run Aggregate Supply <ul><li>Output firms produce after price level and factor prices have fully adjusted after any shift in aggregate demand. </li></ul><ul><li>Keynesians illustrate LRAS as perfectly elastic at low levels of output, then upward sloping over a range of output and finally perfectly inelastic – in the long run the firm can operate at any level of output and not necessarily at full capacity. </li></ul><ul><li>New Classicals illustrate LRAS as vertical </li></ul><ul><li>The LRAS shifts due to changes in quality and quantity of resources eg. Education, net migration, technology </li></ul>
  11. 12. LRAS (Keynesian) LRAS Q1 Q2 Real GDP Price level 0
  12. 13. LRAS (Classical operating at full capacity) Real GDP Price level Q 0
  13. 14. AD and AS AD AS Q P Real GDP Price level AD1 AS1
  14. 15. Great Work <ul><li>Show your understanding by doing some questions </li></ul>