ECON 102 Lecture Notes - Lecture 21: Debt Deflation, 1997 Asian Financial Crisis, Business Cycle

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Adam Stevenson

Document Summary

The classical model of money assumes no stickiness - markets are perfectly efficient. When the money supply rises, ad shifts outwards. In terms of monetary policy, prices will move and the markets will immediately respond and adjust (self-correcting mechanism) Because of the lack of stickiness, the sras curve can immediately respond, raising wages and putting the economy back into lr equilibrium. The economy jumps from one lr equilibrium to another. No adjustment, no business cycle (as generated by market imperfections like sticky prices) Classicals wouldn"t admit the existence of an sras (which assumes sticky wages) Classical economists deny the existence of sras because they assume perfect markets. A classical economist using the keynesian terms would say the sras immediately shifts left as the sras moves right. Prices rise - jump to new lr - there is no medium effect. Illustration of a classical macroeconomy, assuming the existence of a sras to highlight the point.