suppose that, due for example to reconstruction after a war, the capital stock of a
nation increases. using the graphical framework of 3-4 to illustrate the effect that the
increase in the capital stock would have on output, employment, and the real wage in
the classical model.
Give this one a try later!
With an increase in the capital stock, labor productivity increases leading
to an upward shift in the labor demand curve, and resulting in an increase
in the equilibrium real wage and quantity of labor. The production function
shifts upward, and in addition there is a movement along the new
production function as labor increases. The aggregate supply curve shifts
to the right.
Explain how the origins of Keynesian revolution can be found in the problem of
unemployment
Give this one a try later!
, The Great Depression showed extreme and persistent unemployment.
Classical economic theory emphasizes self-adjusting market equilibrium
and could not explain the long-term unemployment. People sought other
theory to explain the event.
Define the term "velocity of money". What factors determine the velocity of money in
the classical system? what is the relationship between the velocity of money and the
Cambridge k?
Give this one a try later!
The velocity of money is the number of times money is used in transactions
of current output. Velocity of money is usually determined by spending
habits of society. In the Cambridge model, k (nominal income) is assumed
stable in the short-run. K is the reciprocal of V (K= 1/V) so V will be stable in
the short-run assuming equilibrium situations.
Explain how the interest rate works in the classical system to stabilize aggregate
demanding the face of autonomous changes in components of aggregate demand
such as investment or government spending.
Give this one a try later!
The interest rate increase in response to the increase in the demand for
loanable funds due to the increase in government investment. This increase
in the interest rate causes an induced decrease in investment as firms
believe projects are less profitable. The increase in the interest rate also
causes an increase in savings, which has as its mirror image a decrease in
consumption demand. These interest rate induced decreases in investment
and consumption counterbalance the effects of the initial autonomous
increase in government investment. Y= C + I+ G
nation increases. using the graphical framework of 3-4 to illustrate the effect that the
increase in the capital stock would have on output, employment, and the real wage in
the classical model.
Give this one a try later!
With an increase in the capital stock, labor productivity increases leading
to an upward shift in the labor demand curve, and resulting in an increase
in the equilibrium real wage and quantity of labor. The production function
shifts upward, and in addition there is a movement along the new
production function as labor increases. The aggregate supply curve shifts
to the right.
Explain how the origins of Keynesian revolution can be found in the problem of
unemployment
Give this one a try later!
, The Great Depression showed extreme and persistent unemployment.
Classical economic theory emphasizes self-adjusting market equilibrium
and could not explain the long-term unemployment. People sought other
theory to explain the event.
Define the term "velocity of money". What factors determine the velocity of money in
the classical system? what is the relationship between the velocity of money and the
Cambridge k?
Give this one a try later!
The velocity of money is the number of times money is used in transactions
of current output. Velocity of money is usually determined by spending
habits of society. In the Cambridge model, k (nominal income) is assumed
stable in the short-run. K is the reciprocal of V (K= 1/V) so V will be stable in
the short-run assuming equilibrium situations.
Explain how the interest rate works in the classical system to stabilize aggregate
demanding the face of autonomous changes in components of aggregate demand
such as investment or government spending.
Give this one a try later!
The interest rate increase in response to the increase in the demand for
loanable funds due to the increase in government investment. This increase
in the interest rate causes an induced decrease in investment as firms
believe projects are less profitable. The increase in the interest rate also
causes an increase in savings, which has as its mirror image a decrease in
consumption demand. These interest rate induced decreases in investment
and consumption counterbalance the effects of the initial autonomous
increase in government investment. Y= C + I+ G
