S10 MyCh11_1 - Ch. 11 Keynesianism: Wage/Price Rigidity 1...

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Unformatted text preview: Ch. 11 Keynesianism: Wage/Price Rigidity 1 Motivation Wage rigidity Price Rigidity Policies for stabilization Zero-bound 2 Motivation The Classicals maintain Unemployment is frictional, due to mismatch Money is neutral, so anti-cyclical policy is unhelpful Cyclical fluctuation is due to either money-based , due to misperception or, has real causes, as Eugen Slutsky showed, the system can aggregate random shocks into cycles, (See below, from Ch. 10 of text) Figure 10.3 Small shocks and large cycles Cyclical pattern Random Shocks from Economic structure produces 4 I. Critique of Classical School on Keynesians: The Classical School view is rooted in the micro-foundations of macro-economics- It is the only game in town;- Keynesianism is jerry-built. 5 Wage rigidity as claimed by Keynes N D NS u, involuntary unemployment at wage w w 6 To Lucas, w can only be defined by market clearance. Workers did not offer wage cut to stay on job. So NS N D NS w 7 II. Keynesians disagree and claim that: Wages and Prices can be sticky, stuck in recession/depression not just according to observations but also arising from logic reasoning Rigidity can be integrated into IS-LM, AD-AS paradigm Studies in labor economics offer help Markets are not always cleared (as in competitive equilibrium) Government policy is defensible in such a framework Money is not neutral, when one looks deeper Business fluctuations have explanations in Keynesian context 8...
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S10 MyCh11_1 - Ch. 11 Keynesianism: Wage/Price Rigidity 1...

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