The Neoclassical Macromodel
All you sneaky devils already took the library books that I searched for oh-so dilligently last night, so Greenlaw gave me a website to look at!
http://cepa.newschool.edu/het/essays/mac…
The website outlines neoclassical macroeconomic theory, starting with Fisher and working up to a complete economic model. Basically, it was everything we learned in Intermediate where you have the four graphs going at once and you feel very accomplished after realizing you understand what’s going on in each of them.
The model assumes that wages are highly flexible, and adjust instantly to price changes. All shocks to the system are assumed to be from external events, and the money supply is exogenous to the model completely. Wage/price determines the location of equilibrium in the labor market, which determines the supply of goods and services that will be produced. Demand determines what the rate of interest will be.
The biggest issue with this model is that it completely denies the importance of the money market in the aggregate economy. All changes in money are considered “illusory” and do not effect the real economy. Monetary theory was tacked on to the end of the neoclassical macromodel, but never really worked into it.
Expect this to be updated more thoroughly later.
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