Reference no: EM133129162

Needing a 100 word response

Rittenberg & Tregarthen (2014) explains that "Rigidity of other prices becomes easier to explain in light of the arguments about nominal wage stickiness. Since wages are a major component of the overall cost of doing business, wage stickiness may lead to output price stickiness" (p. 173). Classical economists believe that prices and wages are flexible while Keynesian economists believe that prices and wages are more rigid. One example Keynesian economists may use to support this theory is the argument that employees will not want to work for wages that fluctuate with the market when demand is low or for wages that are so low that they are not able to support themselves ("Keynesian price-wage rigidity", 2015, para. 1). Keynesians would suggest that the government should increase spending during periods of low demand to create more demand and stabilize falling prices. However, increased deficit spending causes inflation to rise which also lowers demand in the aggregate economy. Another way that the government can influence wage-price rigidity is the government establishing a minimum wage for employees required by law. However, Keynesians do believe minimum wage laws cause higher unemployment rates.

At face value, minimum wage laws seem like a sensible idea that could protect workers from being taken advantage of by some employers that do not want to pay a fair rate for unskilled labor. However, minimum wage laws that require wages that exceed the value of the labor for certain jobs will cause employers to try to find ways to eliminate those jobs. This will cause unemployment rates to rise. High unemployment rates leads to lower demand. High unemployment rates also leads to the government printing and spending money to pay unemployment benefits to unemployed workers. This causes inflation to rise. As previously stated, inflation also lowers demand.

The U.S. government does not try to set prices for products and Keynesian economists do not support price controls. The concept of governments establishing price controls on products is a tried and failed Communist economic policy that disrupts the natural balance of supply and demand leading to low supply. I believe that it is appropriate for the government to intervene to some extent in the most extreme instances of economic turmoil to prevent an economic collapse. However, government intervention usually involves printing and spending money which increases inflation and could potentially devalue the currency to the point of an economic collapse. I think that the government should not create policies to try to artificially impact markets because it can do more harm than good. The government should not try to maintain high levels of demand by stimulating the economy through printing and spending money. The government cannot spend its way out of every economic problem and reckless deficit spending can ultimately cause a country to collapse.