Copy of Additional questions on Keynesian Answer Guide.pdf

Copy of Additional questions on Keynesian Answer Guide.pdf...

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ECC2010/ECC5901 Additional Questions on the Keynesian model Question 1 State the main differences between the Real Business Cycle theory and the Keynesian business cycle theory discussed in class. Answer: Real Business Cycle Keynesian Real wage and prices are perfect flexibility and adjust rapidly. Real wage is rigid due to efficiency wages and prices are sticky due to menu costs; real wage and prices are slow to adjust. Markets clear quickly, and so the economy returns to general equilibrium rapidly when the economy is hit by economic shocks. Markets clear slowly, and so the economy returns to general equilibrium slowly when the economy is hit by economic shocks. There is no involuntary unemployment. Efficiency wages cause involuntary unemployment. Money is neutral almost all the time. Money is not neutral before prices adjust. Short-run fluctuations arise mainly because of supply shocks (=productivity or technology shocks).
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