Classical Macro-Economic Theory

Abstract

The analysis of equilibrium in the short-run is based on the simplifying assumption that the period considered is so short that, although there is autonomous investment, the consequent changes in the stock of capital K can be ignored. The main variables are flows, of income and employment or of investment and saving, which refer only to one point of time or to one period. We relate them at a given time (or period); there are no links between one time (or period) and another. The same is true of the variables or parameters in the form of rates or ratios: the price level, the wage rate, the marginal propensity to save. Moreover, since K is taken as fixed and ignored, we are not interested in the rate of profit on capital, ρ = P/K. On the other hand, the ruling (short-run) rate of interest does enter as a variable of the problem, so that expectations can be summarised (in the form of present values) and confined to the same point (or period) of time.