Macroeconomics A2 help!!
Last year I done Keynesian Macro but this year I'm learning the Classical concepts, but I'm finding it difficult to understand it in relation to inflation, economic growth and unemployment.
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
Classical economists believe that the economy is self-regulating. This is because wages rates are perfectly flexible and instantly adjust to changes in real income. Say there is a fall in net exports, since this a component AD, AD will also fall. This will reduce the price level, resulting in an increasing in purchasing power for workers and a relative increase in costs for firms, since wages are perfectly flexible, workers will accept a fall in real wages, shifting AS outwards and bringing the economy back to full employment, as they instantly recognise this redistributive effect. (Real wages move in step with the price level, this is how we form the LRAS curve, so the short term becomes the long-term essentially). So, since they believe the economy will restore full employment unaided, they do not suggest the use of fiscal or monetary policy. Neoclassical economists have the same policy recommendations, but slightly different ideas. They suggest business cycle fluctuations are the efficient responses of markets to the uneven pace of technological change.
Classical economists believe the economy doesn't grow due to population increases (decreases) following any increase (decrease) in real income per person and thus cancelling it out.
Neoclassical economists believe the economy can grow but constant technological advances are needed as diminishing returns prevent any real benefits from accumulating massive amounts of human and physical capital. They argue that the population size won't respond the way classical economists suggest, as higher real incomes per person increase the opportunity cost of having children and thus the population won't necessarily increase when real gdp per person increases.
Keynesian's believe that the wage rate is not flexible and therefore will not adjust with the price level. This means a fall in AD can lead to long and deep recessions as aggregate supply will not adjust to bring the economy back too full employment.
New Keynesian's believe the price level and the wage rate are inflexible, this means SRAS is horizontal and thus, a fall in AD will lead to longer and deeper recessions, making the need for stimulation of AD through fiscal or monetary policy even more desirable.
The trend rate of growth is the average rate of economic growth which is considered to be sustainable over time. I.e no inflationary pressures.
Classical economists believe the economy doesn't grow due to population increases (decreases) following any increase (decrease) in real income per person and thus cancelling it out.
Neoclassical economists believe the economy can grow but constant technological advances are needed as diminishing returns prevent any real benefits from accumulating massive amounts of human and physical capital. They argue that the population size won't respond the way classical economists suggest, as higher real incomes per person increase the opportunity cost of having children and thus the population won't necessarily increase when real gdp per person increases.
Keynesian's believe that the wage rate is not flexible and therefore will not adjust with the price level. This means a fall in AD can lead to long and deep recessions as aggregate supply will not adjust to bring the economy back too full employment.
New Keynesian's believe the price level and the wage rate are inflexible, this means SRAS is horizontal and thus, a fall in AD will lead to longer and deeper recessions, making the need for stimulation of AD through fiscal or monetary policy even more desirable.
The trend rate of growth is the average rate of economic growth which is considered to be sustainable over time. I.e no inflationary pressures.
Original post by d9717
Last year I done Keynesian Macro but this year I'm learning the Classical concepts, but I'm finding it difficult to understand it in relation to inflation, economic growth and unemployment.
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
(edited 9 years ago)
Original post by d9717
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
The classical economist believe that in the long-run the economy is self correcting so that the economy will be at full employment by workers accepting wage cuts and the SRAS shifting so it cuts AD at the LRAS equilibrium, right?
1) If there is cost-push inflation, would classical economist use demand-side policies (monetary policy) to reduce inflation or would it let the economy self correct by itself and let the SRAS shift back to the LRAS equilibrium.
For example here there is cost push inflation but would it use demand-side policies? http://www.bized.co.uk/sites/bized/files/images/c_push.gif
2) However if the inflation is demand-pull http://www.bized.co.uk/sites/bized/files/images/virtual/bank/sras.gif
Would they would use demand side policies or supply-side policies? (since classical economist believe in supply-side, I'm unsure if they would use demand side polices if there is demand-pull inflation)
3) Classical economist don't believe in demand-deficient employment, right? So to reduce the unemployment they would only use supply-side policies? Also does the economy always go back to full employment in the long-run according to classical economists even if there is real wage unemployment in the short-run?
4) The Phillips curve shows the trade off with unemployment and inflation, but does the short-run Phillips curve support Keynesian arguments and the long-run Phillips curve support classical arguments? Or it does it support neither and just purely shows a trade-off?
5) In regard to economic growth, I don't fully understand the business cycle. Is the trend rate of growth an average of past economic growth of an economy? And also what is the relation between it and the LRAS?
6) To achieve potential economic growth do classical economist only use supply-side policies? I know from last year Keynesian economist use both since if the economy is in recession then shifting the LRAS won't improve the equilibrium position of the economy. http://www.s-cool.co.uk/assets/learn_its/alevel/economics/aggregate-demand-and-aggregate-supply/supply-side-policies/2007-12-04_120319.gif
7) Also in an recession/boom, do classical economists NOT use any polices at all to get the economy back to the full employment level? Do they just let the economy self-heal through shifts in the SRAS?
Lots of questions but can you please try to answer a few of them thanks!!!
Thank you very much!
Sorry for the late reply! Got caught up with exam stress 
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