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The Classical Model

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Macroeconomic Policy

Part of the book series: Springer Texts in Business and Economics ((STBE))

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Abstract

In this chapter, changes in the rate of inflation are finally incorporated into the ISLM–ADAS analysis.

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Notes

  1. 1.

    This is a simplified version of the labor market. Later, in Chap. 10, labor supply and demand will be functions of expected and current tax rates in the supply-sider paradigm.

  2. 2.

    The Y0 coincides with Y0 in the production function reflected down into (P, Y) space. The P0 is not anchored by any lateral location.

  3. 3.

    In this case, the ratio M/P0 fell to M/P1. There is no change in monetary policy in this example; M stays unchanged.

  4. 4.

    Contrast this with the result from Chap. 7 incorporating a flat AS. An increase in G resulted in a strong multiplier effect as Y increased along with private consumption C. Conveniently, in Chap. 7, inflation was conspicuously absent by construction of the horizontal AS.

  5. 5.

    The New Classical AS is also known as the Rational Expectations AS curve. This curve is the “engine-room” of the supply-sider paradigm and will be the subject of Chaps. 10 and 11.

  6. 6.

    The interest rates in the ISLM space are short-term (typically 1-year) interest rates.

  7. 7.

    This comment anticipates the neutrality propositions proposed by the later rational expectationists (Robert E. Lucas, Robert Barro) in an era of New Classical macroeconomics that began in the late 1970s-early 1980s.

  8. 8.

    Note that the classicists had no serious experience with falling prices. It was assumed that nominal wages would also fall in proportion to prices. They were wrong.

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Authors and Affiliations

  1. Rutgers Business School, Rutgers University–Newark and New Brunswick, Newark, NJ, USA

    Farrokh K. Langdana

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  1. Farrokh K. Langdana
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Correspondence to Farrokh K. Langdana .

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© 2016 Springer International Publishing Switzerland

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Langdana, F.K. (2016). The Classical Model. In: Macroeconomic Policy. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-32854-6_8

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