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 don’t 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 employer’s search costs c) Reduce employer’s 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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