The Keynesian Model

The Keynesian Model - Econ 1021 FALL 2009 The Keynesian...

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Unformatted text preview: Econ 1021 FALL 2009 The Keynesian model of the macroeconomy Outline: 1. Introduction 2. The labor market 3. Characterizing AD in a closed economy a) The Keynesian cross 4. SR equilibrium & adjustment to eqm 5. Link to savings & investment 6. Multiplier 7. Public policy implications Reading: pp. 158-162 (again), 215-229, 234-240, 250- 252, 254-257, 315-316, and 324-325 from Macroeconomics in Context The Labor Market in the Keynesian Model Certain aspects of real-world human psychology & institutions may make it unlikely that wages are sufficiently flexible to clear the labor market. Focus on why wages dont drop enough to clear the labor market, despite surplus of labor. wage stickiness as explanation for positive cyclical unemployment. Reasons for Wage Stickiness 1. Psychological resistance to (nominal) wage reductions 2. Minimum wage legislation 3. Long-term contracts 4. Insider-outsider theory 5. Efficiency wage theory a) Improve employee productivity b) Reduce employers search costs c) Reduce employers training costs Recall Behavioral relationship: AD = C + II + G + NX Accounting Identity: Y = C + I + G + NX Equilibrium Y = AD Insufficient AD: Y > AD & leakages > injections Excessive AD If economy is not in macroeconomic equilibrium, then something has to adjust Classical model Keynesian model Assumptions...
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The Keynesian Model - Econ 1021 FALL 2009 The Keynesian...

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