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 ofthe Classical Model: the labor market, Say’s Law, the loanablefunds market and the quantity theory of money.
b. While making use of these four components, provide anexplanation of why this model implies that there is no need for anyaggregate demand management to maintain full employment. (Pleaseemphasize, in particular, the role played by flexible prices andwages).
2.
a. Provide a detailed analysis of the three crucial componentsof Keynes’ Model: the consumption function, the determinants ofinvestment demand and the speculative demand for money.
b. Assume that nominal wages are rigid. Use these components toexplain why, in this model, the economy can come to rest at anequilibrium with involuntary unemployment.
c. What policy tools can be used to move such an economy to astate of full employment? Provide an analysis of how these toolscan achieve this objective.
3.
a. Derive the IS and LM curves. Explain how the IS curve helpsaddress a flaw in the Classical Model. And explain how the LM curvehelps address a flaw in Keynes’ Model.
b. Using the IS-LM framework, determine the conditions underwhich monetary and fiscal policy will be most effective inrestoring the economy to a state of full employment.
c. Does the emergence of a state of equilibrium with involuntaryunemployment rest on the assumption of rigid nominal wages or doesit rest on the existence of speculative demand for money? Use theIS-LM framework to provide an answer to this question.
4.
a. According to the most fundamentalist Keynesians in the 1950sand 1960s, changes in the quantity of money were deemed to have noeffect on aggregate nominal income. How did these Keynesians arriveat this conclusion? What does such a view imply regarding thenature 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 thatchanges in the money supply do have a significant impact onaggregate nominal income?
c. According to Friedman money is non-neutral in the short runand neutral in the long run. Explain how he arrives at thisconclusion. What are the implications of his argument for thevalidity of the Phillips Curve?
