Gordon_Answers11e_ch17 - Chapter 17 New Classical Macro...

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Chapter 17 New Classical Macro Confronts New Keynesian Macro 187 Section 17-10 discusses the efficiency wage model. This is a theory explaining real wage rigidities that has received much attention. It establishes a relationship between the real wages paid to workers and their efficiency. Implications of this theory include that firms pay a wage rate that is above the market clearing level and that they will be reluctant to cut their wage rate in the face of declining demand, choosing instead to adjust their employment level. Section 17-11 concludes the chapter with some criticisms of the new Keynesian model. There is also a discussion of the differing implications of the new Keynesian theory and the other models. Remind students that the new Keynesian model uses microeconomics to explicitly explain why wages and prices are slow to adjust. It assumes non-market-clearing for both workers and firms. It also overcomes many criticisms brought against other theories of the business cycle. A criticism of the new Keynesian model is its inability to explain the existence of business cycles before the era of union contracts. Also, the existence of long-term staggered labor contracts need not always imply slow adjustment of wages and prices. In countries where policymakers are expected to pursue inflationary policies, for example, full indexation may avoid the slow adjustment of wages and prices implied by overlapping-staggered labor contracts. ± Changes in the Eleventh Edition The structure and content of Chapter 17 are moderately changed from the 10th edition. Major changes have occurred in Sections 17-2 and 17-3. In Section 17-2, Subsection 17-2(a), “Distinctive Features: Market Clearing and Imperfect Information,” has been modified completely. Gordon has replaced the major part of the discussion from the 10th edition with a new explanation and dropped the Figure 17-1 where “A Business Cycle in the Fooling Model” was explained. In Section 17-3, he deleted Subsection 17-3(b), “The Friedman-Phelps-Lucas Supply Functions and the Price Surprises,” along with the Figure 17-2. He modified and expanded the discussion about the topic “The Assumption of Rational Expectation,” in Subsection 17-3(a) in greater detail to incorporate the major idea from the deleted Subsection 17-3(b). The rest of the chapter has remained mostly unchanged. As Figures 17-1 and 17-2 from the 10th edition have been deleted, the rest of the figures have been renumbered accordingly in the 11th edition. The IP Box in Section 17-5 on productivity fluctuations in the United States and Japan has been updated through year 2006. ± Answers to Questions in Textbook 1. The Friedman model assumes that workers do not accurately perceive changes in the price level.
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This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch17 - Chapter 17 New Classical Macro...

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