ABSTRACT
This chapter turns our attention to one of the most popular and sometimes controversial models used by macroeconomists, the neoclassical model. The model, in its purest form, is often used as a benchmark or starting point for adding “realism” to the structure of the economy. However one views the neoclassical model, there is no denying that it is a powerful tool for generating predictions about movements in economic aggregates. As such, this chapter works through the comparative static exercise of a change in the money supply. This exercise provides a great deal of insight into how the monetary authority might influence the economy or whether it can influence the economy at all. A number of important issues are raised, for example money neutrality and money illusion. Additionally, the chapter formally derives the aggregate supply curve in the neoclassical context. The model has serious implications for the existence of a natural rate and also for the formation of expectations.
