ECON-UA 1 Chapter Notes - Chapter 8: Real Wages, Diminishing Returns, Logarithmic Scale
17 Mar 2016
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Document Summary
Macroeconomic models: classical versus keynesian, classical model - explains the long-run behavior of the economy. Business cycles come and go, but economy eventually returns to full employment. Real gdp is plotted with a logarithmic scale, so that equal vertical distances represent equal percentage chances rather than equal absolute changes. If real gdp grew at a constant percentage rate, graph would be straight line. Great depression of 1930s caused economists to question the classical model because the economy wasn"t working the way the model said it should. Keynesian model changed economists" thinking: why the classical model is important. Active counterrevolution against keynes"s approach to understanding the macroeconomy. Better understand the controversies on newer schools of thought. Remains best model for understanding economy over the long run: assumptions of the classical model. Most assumptions about classical model are implying to make it more manageable. Markets clear - adjustment of prices until quantities supplied and demanded are equal.
