MacroEconomic Models

I found a good free macro econ text. It is Intoductory Macroeconomics, by Povey, and is available at users.ox.ac.uk/~sedm1375/book.pdf‎.

For me, what makes it excellent is that it presents the macro economic models in their succinct mathematical formulation. The classical and Keysian are there, the first being long run and the second being short run.

As long run economics goes, there is no imbalance or market inefficiencies. The First Theorem of Welfare Economics holds, perfect cometition. The labor, money, and financial markets all clear.

The basics of this Classical Economic model allows for the equation of exchange, MV=PQ which is also GDP=C+I+G+NX.

A consequence of the equation of exchange is that at long term equilibrium and efficiency afforded by the Classical model, prices are a function of the supply of money, specifically the countable supply in circulation. MV=PQ is an identity. All money spent on Q, accounted for by P, is all money in M. It is also all income spent on Q. As such, prices are always a function of the money supply, given that Q is set. This is what accounts for inflation, an increase in the money supply without a corresponding increase in production.

Another consequence of the money supply on prices is that only after-tax, disposable income, has any effect on prices. In the long run, equilibrium to equilibrium, the tax level has no effect on the standard of living. Standard of living, Q/l, quanity of goods per person or labor hour, is a function the labor employeed and the efficiency of that production.

This should be readily apparent. All that increases and decreases in taxes do directly is change the money supply in the equation of exchange. There are Keynsian implications of changes in taxes, but these are short run impulses and not a consequence of the classical economic equilibrium model.

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