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Econ 100b

Created 4/30/1996
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Summary of the Classical Model

(or the Full-Employment Model; or the Long-Run Model; in short, the Model Developed in Chapter 3 of Mankiw's Textbook)
(Econ 100b; Spring 1996)

Brad De Long


To find out what are the magnitudes of macroeconomic quantities in this model, start with:

The economy's resources of labor and capital, L and K (or, perhaps, the capital stock and labor supply as a function of the real wage).


Then examine the government's accounts--its purchases of goods and services G and its net taxes (taxes less transfer payments) T.


Then calculate the magnitudes of the private-sector expenditure and production flows.

Thus you calculate all macroeconomic variables of interest from 7 pieces of information

Change any one of these seven pieces of information, and the values of macroeconomic quantities and prices--the economy's equilibrium--will change.


Note: is the equilibrium real interest rate r in the long-run (or "classical", or "full employment", or "chapter 3") model the same as the MPK determined from the production function? Not necessarily. If the equilibrium real interest rate r is less than the MPK (or R*), then investment is probably very high, the economy's capital stock is probably increasing at a rapid rate--more rapidly than output is increasing in terms of percentage growth--and the MPK is probably falling as a result of this "deepening" of the economy's capital stock. If the equilibrium real interest rate r is greater than the MPK, then investment is probably low, the capital/output ratio is probably falling--and the MPK is probably rising over time as a result of this capital "shallowing" (if there is such a word).


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/