Page 59 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes ROI remain unchanged. Since there is no change in any of the real variable there is no change in
full employment.
In the full employment model, change in supply of money has no real effect on the economy.
The money is neutral. The relationship between the real variables is completely independent of
changes in the nominal variables. This independence is called classical dichotomy.

Self Assessment

State whether the following statements are true or false:

10. Real income equals the price level (P) multiplied by nominal income.
11. 'Velocity of Circulation of Money' refers to the average number of times a unit of money
is used for carrying out transactions.

12. Supply of money is independent of the price level.
13. The relationship between the real variables is completely independent of changes in the
nominal variables. This independence is called classical dichotomy.

3.4 Effects of Changes

In the classical model, all the markets are interlinked and a change in one market brings changes
in all other markets. The model can thus be used to understand the effects of various changes in
the economy.

3.4.1 Technological Changes

The effects on different markets are:
1. Labour Market: Technological changes increase marginal product of labour (MP ). The
L
rise in MP in turn increases demand for labour. Supply of labour remaining the same, this
L
raises the real wage rate. Refer to the Figure 3.24. The demand for labour curve D shifts
L
upwards. The real wage rate rises from w to w .
1 2
Figure 3.24
Y
Real S
wage L
rate

w 2 E 2

w 1 E 1 D L 2

D L
1
X
O L f Labour

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