ECON 360-4 - 1) The classicals know the price level where...

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1) The classicals know the price level where as the Keynesians need an explanation need expectations of the price level. The classical aggregate demand supply schedule is vertical with assumptions about the labor market. Labor supply and demand are dependent only on the real wage which is known by all. The vertical supply slope of the classicals which results in the output and employment to be supply determined, and aggregate demand has no role. Keynes on the other hand has an upward and to the right aggregate supply curve. Keynesians aggregate supply view emphasizes the stickiness of the money wage and how markets do not know or cannot know the real money wage. Thus the labor market cannot reach equilibrium with full employment. Keynesians see the economy as unstable and the instability of aggregate demand needs intervention such as fiscal and monetary policies. 2) It is nominal wages that are in negotiated between employers and workers, as opposed to a barter relationship. Nominal wage cuts would be difficult to put into effect because of laws and wage contracts which workers would use to resist wage cuts. The fixed money wage is a very extreme version of the sticky money wage. When the money wage has a slow response to the labor market conditions then assumptions about the fixed money wage are correct for the short run. When the price level rises firms increase output and therefore demand for employment goes up because firms are willing to hire more
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ECON 360-4 - 1) The classicals know the price level where...

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