The Classical Model

1. Write down the Quantity Equation and provide an explanation of all the variables included in it.

2.Use the Quantity Equation to explain the Quantity Theory of Money. Also explain why this theory implies that money is neutral to real GDP and the level of employment in the economy.

3.On a graph draw the demand and supply curves for labor. Explain why these curves are shaped the way they are. Also provide an explanation of the forces that push the wage rate to the equilibrium level.

4.At this equilibrium wage rate there is no unemployment in the labor market in the Classical Model. Is this statement accurate?

5. Provide an explanation of what is meant by the term “full employment” in the context of the Classical Model.

6.Using the Quantity Equation, derive the Aggregate Demand curve. Then use the Aggregate

Demand – Aggregate Supply framework to depict the equilibrium level of output in the Classical Model? Is this equilibrium level of output equal to the full employment level?

7. Why are expansionary monetary and fiscal policy ineffective to combat recession in the world of the Classical Model?

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