Explain the theory of the classical economists that flexible prices and wages ensure that the economy operates at full employment

Keynes broke with the classical and neo-classical economic perspective in regards to the belief of in self-correcting free markets. Discuss and explain Keyne's critique of Say's law and discuss why Keynes argued markets could reach equilibrium below the natural rate of unemployment.

Using the AS AD diagram, starting a bit away from full employment assess the economy when wages increase, and stock market values decrease.

According to neoclassical theory of the labour market the intersection of supply and demand for labour determine the nominal wage in equilibrium. True or False

When the economy is at its full employment level, is the unemployment rate zero? Justify your answer.

Describe the four phases of the classical business cycle   explaining how employment is typically affected during each                                            phase?

Consider a one-sided search model of unemployment we developed in class. In class discussion we never mentioned how unemployment insurance benefit, b, is financed. For this question, you are going to incorporate it to the model. Let's assume that in order to finance the unemployment insurance benefit, b, the government imposes lump-sum tax, T, on each employed worker. Assuming that the economy is in a long-run steady-state equilibrium, the total amount that needs to be paid out to unemployed workers is bU, where as usual, U repre- sents the fraction of unemployed. The total amount of tax collected (which we can interpret as an unemployment insurance premium) from employed workers is (1U)T. The government runs balanced budget, hence, bU = (1 – U)T. In this new setting, please show the effect of an increase in unemployment in- surance benefits, b, on reservation wage, w*, and on the long-run unemployment rate, U. Using graphs clearly demonstrate how the behavior of this model is…

Using the “Keynesian” labor market and the aggregate production function, explain what happens to the amount of output firms are willing to produce … If there is an increase in the price level. If there is a decrease in the price level.

Compare and Contrast the Classical and Keynesian assumptions about the flexibility of prices and wages.