The Long-Run Model (The Classical World)

This chapter ties together the pieces from Chap. 4 to show how the equilibrium level of output is determined, and then how the output and the expenditure functions from Chap. 5 together tell us how much of each type of expenditure there is, as well as determining the equilibrium interest rate. Also, this is where the information about resource supply from Chap. 4 gets incorporated into the labor market in a way that allows the conditions of resource supply to help determine equilibrium in the labor market. The concept of “potential output” is introduced and identified with the equilibrium output level of the model here.