Question

Advance Macroeconomic

Please feel free to make use of graphs as you see fit

1.

a. Provide a detailed analysis of the four crucial components of the Classical Model: the labor market, Say’s Law, the loanable funds market and the quantity theory of money.

b. While making use of these four components, provide an explanation of why this model implies that there is no need for any aggregate demand management to maintain full employment. (Please emphasize, in particular, the role played by flexible prices and wages).

2.

a. Provide a detailed analysis of the three crucial components of Keynes’ Model: the consumption function, the determinants of investment demand and the speculative demand for money.

b. Assume that nominal wages are rigid. Use these components to explain why, in this model, the economy can come to rest at an equilibrium with involuntary unemployment.

c. What policy tools can be used to move such an economy to a state of full employment? Provide an analysis of how these tools can achieve this objective.

3.

a. Derive the IS and LM curves. Explain how the IS curve helps address a flaw in the Classical Model. And explain how the LM curve helps address a flaw in Keynes’ Model.

b. Using the IS-LM framework, determine the conditions under which monetary and fiscal policy will be most effective in restoring the economy to a state of full employment.

c. Does the emergence of a state of equilibrium with involuntary unemployment rest on the assumption of rigid nominal wages or does it rest on the existence of speculative demand for money? Use the IS-LM framework to provide an answer to this question.

4.

a. According to the most fundamentalist Keynesians in the 1950s and 1960s, changes in the quantity of money were deemed to have no effect on aggregate nominal income. How did these Keynesians arrive at this conclusion? What does such a view imply regarding the nature of the demand for money?

b. Provide a summary of the main arguments advanced by Friedman “to bring money back,” i.e., in support of the position that changes in the money supply do have a significant impact on aggregate nominal income?

c. According to Friedman money is non-neutral in the short run and neutral in the long run. Explain how he arrives at this conclusion. What are the implications of his argument for the validity of the Phillips Curve?

Answer 1