Purchasing Power Parity Is an Essay

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The policy prescription for the classical economist will not be to adjust inflation in order to deal with unemployment. In the short run, the classical economist may view that the Phillips Curve holds, but only until the point where workers become informed, at which point they would demand an increase in real wages. In today's information-rich economy, this time lag would be small to the point where a classical economist would not view inflation as a means to dealing with unemployment.

Keynesians believe that the Phillips Curve does hold and therefore government can trade inflation for unemployment. Setting interest rates low for high inflation will create economic expansion which in turn will reduce unemployment.

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The Keynesian would therefore adjust interest rates in order to deal with unemployment.

10. The real interest rate is 25% at equilibrium. The real exchange rate is 170. Consumption will be 700. Investment will be 125. Net exports will be -25.

900 = 300 + (.5*900) -- 200r + 200 -- 300r + 100 +150 -- (0.1 * 900) -- (0.5 (20 + 600r))

-200 = -800 r r = .25

If full employment output moves to 940, then the new rate of interest at equilibrium will be 22%. The real exchange rate will be 152. Consumption will be 726. Investment will.....

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