Classical Approach
Classical Approach of Macroeconomics
After reading this chapter, you will be conversant with: • The Classical Aggregate Supply Model • The Keynesian Aggregate Supply Model • The Classical Analysis of Income Determination
INTRODUCTION EARLIER WE HAVE SEEN THE ROLE OF AGGREGATE DEMAND IN DETERMINING OUTPUT AND EMPLOYMENT AT A GIVEN PRICE LEVEL. WE HAVE SIMPLY KEPT ASIDE SUPPLY SIDE AND ITS ROLE IN THE DETERMINATION OF OUTPUT AND EMPLOYMENT. AS WE HAVE SEEN, THE AGGREGATE DEMAND FUNCTION REPRESENTS THE TOTAL QUANTITY OF OUTPUT WILLINGLY BOUGHT AT A GIVEN PRICE LEVEL, GIVEN THE VALUES OF EXOGENOUS OR AUTONOMOUS COMPONENTS LIKE GOVERNMENT SPENDING, NOMINAL MONEY STOCK AND THE TAX RATE AND BEHAVIORAL PARAMETERS SUCH AS THE MARGINAL PROPENSITY TO CONSUME (MPC), MARGINAL PROPENSITY TO IMPORT (MPI), ETC. THE VARIATION IN THE PRICE LEVEL WAS OF A PURELY HYPOTHETICAL SITUATION. WHATEVER AMOUNT OF GOODS WAS DEMANDED WOULD BE SUPPLIED AT THE EXISTING PRICE LEVEL.
We now turn to a complete model of determination of aggregate output and the price level. To start with, we analyze the conditions determining aggregate supply in both Classical and Keynesian macroeconomic frameworks. Later on we integrate both aggregate supply and aggregate demand functions to have a complete model of income determination and price level, with the help of both Classical and Keynesian analyses. The aggregate supply curve describes the combinations of output and the price level at which firms are willing, at the given price level, to supply the given quantity of output. The amount of output that business firms are willing to supply depends on the prices they receive for their goods and the amount they have to pay for labor and other factors of production. Accordingly, the aggregate supply curve shows conditions in the factor markets, especially, the labor market, as well as the goods market.
In this section we
After reading this chapter, you will be conversant with: • The Classical Aggregate Supply Model • The Keynesian Aggregate Supply Model • The Classical Analysis of Income Determination
INTRODUCTION EARLIER WE HAVE SEEN THE ROLE OF AGGREGATE DEMAND IN DETERMINING OUTPUT AND EMPLOYMENT AT A GIVEN PRICE LEVEL. WE HAVE SIMPLY KEPT ASIDE SUPPLY SIDE AND ITS ROLE IN THE DETERMINATION OF OUTPUT AND EMPLOYMENT. AS WE HAVE SEEN, THE AGGREGATE DEMAND FUNCTION REPRESENTS THE TOTAL QUANTITY OF OUTPUT WILLINGLY BOUGHT AT A GIVEN PRICE LEVEL, GIVEN THE VALUES OF EXOGENOUS OR AUTONOMOUS COMPONENTS LIKE GOVERNMENT SPENDING, NOMINAL MONEY STOCK AND THE TAX RATE AND BEHAVIORAL PARAMETERS SUCH AS THE MARGINAL PROPENSITY TO CONSUME (MPC), MARGINAL PROPENSITY TO IMPORT (MPI), ETC. THE VARIATION IN THE PRICE LEVEL WAS OF A PURELY HYPOTHETICAL SITUATION. WHATEVER AMOUNT OF GOODS WAS DEMANDED WOULD BE SUPPLIED AT THE EXISTING PRICE LEVEL.
We now turn to a complete model of determination of aggregate output and the price level. To start with, we analyze the conditions determining aggregate supply in both Classical and Keynesian macroeconomic frameworks. Later on we integrate both aggregate supply and aggregate demand functions to have a complete model of income determination and price level, with the help of both Classical and Keynesian analyses. The aggregate supply curve describes the combinations of output and the price level at which firms are willing, at the given price level, to supply the given quantity of output. The amount of output that business firms are willing to supply depends on the prices they receive for their goods and the amount they have to pay for labor and other factors of production. Accordingly, the aggregate supply curve shows conditions in the factor markets, especially, the labor market, as well as the goods market.
In this section we