Question

Question 3: Classical Full Employment Model In the context of the Classical Model, graphically illustrate the impact of a cut in net taxes. You must include all three diagrams with at least one feedback loop. Use landscape orientation.
donot write by hand

if u can write clearly，u can also write by hand.i think if write by hand，some words may not be clear.

Answer 1

hi,

Classical Full Employment Model

Over the long term, the classical theory assumes the presence of full jobs without inflation. In the economic system, despite the stability of wage rates, there are inherent competitive forces that seek to sustain full employment and in the long run make the economy generate production at that point. Full employment is thus considered a natural situation, and any deviation from this point is anomalous because competition inevitably drives the economy towards full employment.

Say’s Law of Markets: Say's Law of Markets is at the core of the classical job theory. Jean Baptiste Say, a French economist from the early 19th century, put forward the proposition that "supply generates its own market," known as the Say Principle.

In a state of equilibrium saving, the investment must be equal. When there is some difference between the two, equality is retained by means of the interest rate mechanism. For classicists, motivation is a saving reward. The higher the interest rate, the rising the savings and vice versa. On the opposite, the lower the interest rate, the higher the mutual fund demand and vice versa. If the expenditure reaches saving at any given time, the interest rate will increase.

The method of making savings and investments equal;

RATE OF INTEREST А в с SAVING AND INVESTMENT Rate of Interest equates S and I.

Where S is the curve of savings and I the curve of investments. The two curves converge at E where the interest rate is calculated at Or level and the savings and investment are equal to OA.

1.Quantity Theory of Money and Price Level

The validity of Say's law in a money economy is directly dependent on the classical money theory of quantity which states that the general price level changes directly and in proportion to the money supply. Algebraically stated the principle states that MV= PT where M, V, P, and 7′ are money supply, money speed, price level, and transaction volume.

MiV OUTPUT MV PI P1 WIP MONEY WAGE ---- PP, PRICE LEVEL Increased money supply reduces the real wage rate,

2.Wages Flexibility and Employment

According to Pigou, the tendency of the economic system under free competition is to inevitably produce maximum jobs on the labor market. Unemployment is the product of a rigid wage structure and state involvement in free-market economic functioning. Pigou's argument was that if all government intervention is eliminated and competitive forces are permitted to operate openly, increases in wage levels caused by the market would result in full employment.

REAL WAGE WIP, WP NE I W/P1 W/P - N o No NF EMPLOYMENT Reduced wage rate increases employment

N is the number of workers working, q is the percentage of income obtained as salaries and benefits, Y is the national income for full employment, and W is the average rate of pay for jobs. If Y is a given, then N can only be increased by a reduction in W. And a decrease in the real wage is the secret to full employment.

3.Classical Production Function

As jobs increase, total production also increases before full employment is ready. But when the economy hits full employment, gross production is stable. Therefore, provided the capital assets, technical skills and energy, there is a price relationship between total production and the amount of jobs.

Qaf(K, TN) OUTPUT YO NF EMPLOYMENT The production function under diminishing returns.

Total production is an increasing feature of worker numbers. The short-term growth function of the economy. The curve that is named as Q= f (K, T, N) is a function of the capital stock K. Technology experience T and number of staff N.