aemodel - Keynesian Economics I Keynesian The Keynesian...

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Keynesian Economics I Keynesian Economics I The Keynesian System (I): The Role of Aggregate Demand
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2 Labor Market Labor Market Excess supply and excess demand are not equally strong forces in the labor market. The supply of workers is such that firms can always get the labor they require (at some price), but workers can do nothing to promote their own employment. He argues that the supply curve of labor may have no influence on the observed volume of employment or wage. This is the process by which the labor market operates: 1. Firms decide at the beginning of the period how much employment to offer at the going wage. 2. Labor is given no opportunity to re-contract if fewer are hired than want to be. 3. If, at the end of the production period, entrepreneurs sell all of their output they expected to sell (they operate in a world of great uncertainty), then they will have no reason to change their labor demands. Thus, if we did accept the labor supply curve and the partial equilibrium framework of the neoclassical theory, wages are sticky downward and employment is not always “full” because the adjustment mechanism presumed in the neoclassical theory is not present. Thus a Keynesian equilibrium may be reached, even though the marginal disutility of work lies well below the going wage.
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3 Asymmetric Responses Asymmetric Responses to Real Wage Changes to Real Wage Changes Consider the market response to a change in real wages. Specifically, what happens when real wages decline? Keynes argues that changes in real wages ( w/p ) can be accomplished in two ways. Nominal wages can be reduced, or the price level can rise. But It would be more appropriate to write:  ∆  ∆ p w N p w N p w N p w N d d s s ) , ( p w N N s s = ) , ( p w N N d d =
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4 Asymmetry, Continued Asymmetry, Continued A price level increase is not a relative wage change. Firms, on the other hand, see price level increases as an opportunity for increased profits since the lags in the production process imply that the cost of inventories is at older, lower levels. Therefore, an increase in the price level is likely to meet with a greater positive response by firms than the negative response by workers (labor suppliers, i.e., households). Workers will resist reductions in their nominal wages. There are several reasons: Reductions in wages are relative wage reductions. Relative wage reductions damage the workers’ market power.
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This note was uploaded on 02/25/2012 for the course CHEM 309 taught by Professor Staff during the Spring '11 term at UConn.

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aemodel - Keynesian Economics I Keynesian The Keynesian...

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