hw6solve - problem set six solutions 1.) Since Keynesians...

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Unformatted text preview: problem set six solutions 1.) Since Keynesians assume that business cycles are driven by demand shocks, the production function (the long run aggregate supply, or full employment line) does not move. Consider two levels of output: full-employment output Y and Y > Y . In order to produce an output higher than the full employment level, employment must increase. However, if employment increases and the produc- tion function has not changed, the marginal product of labor for every workers added above ( Y ) is less than the marginal product at ( Y ). Thus, average labor productivity will fall. Empirically, however, the opposite is observed. In order to reconcile their theo- ries with reality, Keynesians assume that firms hoard labor. Labor hoarding means that firms are hesitant to fire workers during a downturn and will opt instead to use the workers less intensively. During an expansion, firms will use workers more intensively. This kind of behavior will cause the marginal product of labor to beintensively....
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This note was uploaded on 09/03/2009 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.

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hw6solve - problem set six solutions 1.) Since Keynesians...

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