How are employment and output determined using the classical economic model?
Basically output is determined at the intersection of the LRAS curve and the AD curve. The difference between Keynesian and Classical is that in classical we are always at the long run intersection, the time we spend at short run is momentary.More specifically under the real business cycle theory changes in output are caused by supply side shocks that are invisible and constant. Now unemployment is trickier in the classical model. It should work that wages adjust down and anyone that wants to work can. However, because of contracts and minimum wage as well as the unwillingness of current employees to reduce their wage (why on earth would they) we see hiring wages adjust down some what but wages can not adjust enough to clear the labor market. That is why we see unemployment increase in economic downturns.
