The Average Labour Productivity in the Keynesian Coordination Failure Model In

The average labour productivity in the keynesian

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The Average Labour Productivity in the Keynesian Coordination Failure Model In the good equilibrium, output is high, employment is high, and average labour productivity is high, and vice versa. In this figure, average labour productivity is the slope of a ray from the origin to the relevant point on the production function. The average labour productivity must be procyclical, as it is higher in the good equilibrium than in the bad equilibrium.
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Procyclical Money Supply in the Coordination Failure Model If the money supply is a sunspot variable in the coordination failure model, then money may appear to be non-neutral because people believe it to be. When the money supply is high, everyone is optimistic, and output is high, and vice versa. In this figure we can still have the price level moving countercyclically, provided money supply does not fluctuate too much. In the good equilibrium, nominal money demand is PL(Y 2, r 2 ), and in the bad equilibrium, money demand is PL(Y 1, r 1 ).Money supply increases in the good equilibrium from M 1 to M 2 and the price level falls from P 1 to P 2 . Here, though money is actually neutral, it can appear to be causing business cycles.
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Policy Implications of the coordination Failure Model Stablizing Fiscal Poicy in the Coordination Failure Model Fiscal policy can stabilize output in the coordination failure model by eliminating multiple equilibria. Here, with a decrease in government spending, output demand curve shifts left and the output supply curve shifts right and this can produce a unique equilibirum where Y = Y * and r = r*. From this figure we can see that there are initially two equilibria, a bad equilibirum where the real interest rate is r 1 and the output level is Y 1 , and a good equilibrium where the real interest rate is r 2 and the output level is Y 2 . Then, suppose the government reduces current government spending G . This will shift the output supply curve to the right from Y s 1 to Y s 2 and the output demand curve from Y d 1 to Y d 2 . If government reduces G by just the right amount, then there is only one equilibrium, where Y = Y * and r = r*. Effectively the bad equilibirum gets better and the good equilibirum gets worse, because of the decrease in G , and there are no business cycles.
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Business Cycle Theories and the 2008-2009 Recession Real Business Cycle Model and Coordination Failure Model fit average business cycle behaviour well. But the fit to the 2008-2009 recessions is not so good. Small drop in Solow residual. Price level procyclical. Obvious importance of financial factors, which play no role in either model. Macroeconomists received a lot of criticism during and after the financial crisis. Some, including Paul Krugman, thought that modern macro models were not useful in understanding what was going on at the time. For the two models in this chapter, we can ask how they fit the data for this period.
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