Discuss how the new classical economists (hint, island) addressed the fact that money is leading and...

 

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Discuss how the new classical economists (hint, island) addressed the fact that money is leading and pro-cyclical. Be extremely specific in the model that was developed (tell a story) and relate the assumptions in the model to the empirical fact above. Include a completely labeled AS - AD diagram in your answer and be sure to explain why output changes, given a change in the money stock. Be sure to refer to the Lucas aggregate supply curve to support your answer by starting at an initial equilibrium point A in both diagrams (Y= Ya, P = Pa. etc.) and then show the short-run as point B and the long run as point C. Be sure to explain why workers change their behavior and why firms change their behavior. In the last part of your essay, discuss what determines the power of monetary policy (in terms of changing output) in this model, what determines how long the short run is, and whether or not you believe that this model is a solid basis for conducting countercyclical monetary policy, i.e., is money neutral in this model or not? Finish the essay by commenting on the following: This model was developed back in the 1960s and 1970s and we are now in the 21st century. Do you believe the model is more relevant or less relevant today relative to when it was written? Explain. Discuss how the new classical economists (hint, island) addressed the fact that money is leading and pro-cyclical. Be extremely specific in the model that was developed (tell a story) and relate the assumptions in the model to the empirical fact above. Include a completely labeled AS - AD diagram in your answer and be sure to explain why output changes, given a change in the money stock. Be sure to refer to the Lucas aggregate supply curve to support your answer by starting at an initial equilibrium point A in both diagrams (Y= Ya, P = Pa. etc.) and then show the short-run as point B and the long run as point C. Be sure to explain why workers change their behavior and why firms change their behavior. In the last part of your essay, discuss what determines the power of monetary policy (in terms of changing output) in this model, what determines how long the short run is, and whether or not you believe that this model is a solid basis for conducting countercyclical monetary policy, i.e., is money neutral in this model or not? Finish the essay by commenting on the following: This model was developed back in the 1960s and 1970s and we are now in the 21st century. Do you believe the model is more relevant or less relevant today relative to when it was written? Explain.

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The new classical economists often associated with the Island Model addressed the procyclical nature of money by proposing a model where changes in the money supply do not affect real output in the lo... View the full answer