Mack BrownIntermediate MacroNYU Econ UA-12Recitation 9 –Keynesianism1. What is price stickiness? Why do Keynesians believe that allowing for price stickiness in macro analysis is important?
2. Describe three alternative responses available to policymakers when the economy is in recession. What are the advantages and disadvantages of each strategy? Please discuss the effects on employment, the price level, and the composition of output. What are some of the practical difficulties in using these stabilization policies to fight recessions? In Scenario 1, the government chooses to do nothing. The economy will eventually self correct. Aggregate output is below full employment, which will lower prices, increasing the real money supply and shifting the LM curve to LM2, restoring FN equilibrium at point H. But there is the cost of lost output while waiting. In Scenario 2, if there is an increase the money supply. Instead of waiting for GE to be restored, the Fed can increase the money supply, which would shift the LM curve from LM1 to LM2. If pricesadjust slowly this would return the economy to general equilibrium at point H more quickly. In Scenario 3, if there is an increase in government purchases. An alternative policy would be to shift the IS curve from IS2 to IS1. This policy would also restore the