Lesson Plan - Classical Macroeconomics
- I. Foundations of Classical macroeconomics
- - business cycles
- - definition of a business cycle
- - classical macroeconomics on business cycles
- - automatic market adjustments
- - Say's law
- - flexible wages, prices, and interest rates ensure no
unemployment
- II. How does it work?
- - classical focus on capital markets
- - Investment as the demand for capital
- - why is the demand for capital downward sloping?
- - Savings as the supply of capital
- - why is the supply of capital upward sloping?
- - the interest rate as the price of capital
- - what is the equilibrium in the market? and how is it
maintained?
- - results = as long as interest rates are flexible, no leakages
due to savings and full employment is
achieved
- - the impact of flexible wages and prices when Savings exceed
Investment
- - if S > I then AS > AD (why?), therefore
- - surplus of goods produced which causes falling
prices/layoffs
- - therefore, demand for labor falls, causing surplus of labor
and
- - falling wages
- - but falling wages and prices increase AD (why?) until we move
back to fully employment
- - end result
- - can only be temporarily absent from full employment
- - AS is vertical
- - changes in AD only have an impact on prices not output
- - problems
- - how do we explain the great depression?