8_Keynesian - ECON 100B Intermediate Macroeconomics Week 8...

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ECON 100BIntermediate Macroeconomics Week 8Keynesianism: The Macroeconomics of Wage and Price Rigidity
This Week: Ch 11 of ABCBusiness Cycles in the Keynesian ModelKeynesian Main Shock: Output Demand ShockUnemployment in the Keynesian ModelMoney in the Keynesian ModelFiscal Policy Shocks in the Keynesian ModelStabilization PolicyFinancial Friction (if time allows)
This Week: Ch 11 of ABCBusiness Cycles in the Keynesian ModelKeynesian Main Shock: Output Demand ShockUnemployment in the Keynesian ModelMoney in the Keynesian ModelFiscal Policy Shocks in the Keynesian ModelStabilization PolicyFinancial Friction (if time allows)
The Keynesian Theory of Business CyclesKeynesian business cycle theoryKeynesians:aggregate output demand shocksare the primary sourceof business cycleAggregate demand shocks are shocks to theISorLMcurves:E.g., fiscal policy changes, MS changeschanges in desired investment (MPK changes),changes in desired savings (consumer confidence),
Recession in Keynesian ModelHow does a recession look like in Keynesian model?ISLMASAD
Figure 11.7 A recession arising from an aggregatedemand shock
The Keynesian Theory of Business Cycles and MacroeconomicStabilizationKeynesian business cycle theoryA recession: aggregate demand curve shifts left due toISshifting down,orLMshifting upIt fits certain business cycle facts:Recurrent fluctuations in outputProcyclical employment fluctuatesMoney is procyclical and leading
PRICE STICKINESSPrice stickiness is the tendency of prices to adjust slowly to changes in the economyThe data suggest that money is not neutral, so Keynesians reject the classical model (without misperceptions)Keynesians developed the idea of price stickiness to explain why money isn't neutral
PRICE STICKINESSSources of price stickiness: Menu costMonopolistic competitionIf perfect competition, prices adjust fastsellers are market price takersMonopolistic competition: sellers can set pricesKeynesians: many markets are characterized by monopolistic competition
PRICE STICKINESSMonopolistic competitionSellers do three thingsSet prices in nominal terms and maintain themAdjust output to meet the demand at their fixed nominal priceOnly adjust prices when costs or demand change significantly
PRICE STICKINESS Monopolistic competitionSellers set prices at a markup over marginal cost: P= (1 + η)MC(11.1)If demand turns out to be larger …Efficiency wage adjust output: hiring leads to more output, lower wage leads to less output Output can differ from FEline when prices haven't adjusted
PRICE STICKINESS Monopolistic competitionEffective labor demandProduct demand firm's labor demand Effective labor demand curve, NDe(Y): how much labor is needed to produce the output demandedUpward sloping: firm needs more labor to produce additional output
FIGURE 11.3

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