Page 57 - DECO402_Macro Economics

Macroeconomic Theory

Notes

Figure 5.5
Thing market, savings and equality of investment (I=S) are in balance so the similarity in both on
full employment point E is by the mechanism of interest rate so demanding quantity of things on
full employment is equal to the quantity of supply. Savings is the function of interest rate, I=f(r) and
investment is the opposite function of interest rate, S=f(r).
Currency market is balance by the demand and supply of currency. It is elaborate by the currency
magnitude principle. According to it, price level is the function of currency supply, P=f(MV). The
change in price is proportionate the quantity of currency. Balance is describe by the equation MV=PT
in currency market where MV is the supply of currency and PT is the demand of currency. The
balances of currency market describe the similarity with full employment of the production of price
level, which are penal (E) and (B). Line MQ is related with MQ.
Price level OP is decided by the total production (Q) and the quantity of currency (MV) as show in
panel (B) and (E). Now actual wages is decide with currency wages. As show in panel (D) by W/P
curve. When currency wages is increase by increasing the price level then actual wages W/P is reduce
so there will be effect on level of production and employment. So the conclusion is that get the level of
full employment, currency wages should be reduced. So continuing the situation of full employment,
classical economists were in favour of flexible price-wages.

Task Express your ideas on the classical principle of employment.

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