Equilibrium analysis, Macroeconomics

Assignment Help:

A vital question is whether the equilibrium we have identified in labor market (with a high unemployment rate) can remain in long run. Will there not be adjustments which will take us back to a point with no unemployment? Keynesian justification for why unemployment will persist is as below. 

Goods market is in equilibrium as firms will sell everything they produce and demand for finished goods is satisfied. Firms then have no reason to hire more labor (they will just increase L when YD increases). And as the goods market is in equilibrium so they have no reason to change prices. 

Anyhow we have involuntary unemployment in the diagram above which may create a downward pressure on wages. In the cross model, this won't happen for the below arguments: 

1. Nominal wages are sticky, principally downwards. We barely ever observe cuts in nominal wages. 

2. Nominal wage cuts wouldn't help. With lower wages, income would fall, decreasing aggregate demand even more hence making the situation worse. Lower nominal wages will allow firms to lower prices. Though if prices fall as much as nominal wages, real wages will no, and we had stayed in same paragraph. 

As with classical model, we study most of the check model characteristics in an exercise book. A couple of comments, however, may be of interest already here.

  • It is difficult to illustrate long periods of high unemployment in classic model with the model of labor used there.
  • During the Great Depression in early 1930s (the great depression), it became increasingly apparent that traditional model had flaws. Unemployment was very high for a long time and any adjustment to the balance of labor market wasn't.
  • In Keynesian model, can the economy to be in balance even with a high level of involuntary unemployment and model appeared to be a good explanation for depression.
  • I check the model, financial policy is a very significant role. By increasing G so, the government can increase GDP and hence reduce unemployment.
  • The classic dichotomy between nominal and real variables will disappear in all Keynesian models.

 


Related Discussions:- Equilibrium analysis

Classical model, why and how is price level determined by the monetary sect...

why and how is price level determined by the monetary sector in the classical model?

Number of gallons of pain, The number of gallons of paint that Home Depot s...

The number of gallons of paint that Home Depot sells in a given day is normally distributed with a mean of 150 gallons and a standard deviation of 35 gallons (I realize that the di

#title.williams managerial discretion model, The different between williams...

The different between williams managerial discretion model and baumol''s sales maximization model

Fiscal stimulas, Suppose the consumption function is C = $500 billion + 0.5...

Suppose the consumption function is C = $500 billion + 0.55Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially

Data and methodology - macroeconomy analysis, In order to estimate the VAR,...

In order to estimate the VAR, I have firstly to specify the data which will be analysed. As it is my aim to observe the correlations between oil prices and key macroeconomic variab

Types of taxes and laffer curve, Types of Taxes Which a Government can impo...

Types of Taxes Which a Government can impose on the citizens are as follows: With the theory of taxation covered, we can now move towards the actual menu of the taxes the gover

Geometric gradient series, Determine the present worth of a geometric gradi...

Determine the present worth of a geometric gradient series with a cash flow of $50,000 in year 1 and increases of 6% each year through year 8. The interest rate is 10% per year.

Price results in the efficient quantity, The Price ceiling is the law that ...

The Price ceiling is the law that sets a maximum price below the equilibrium market price, but a price floor is the law that sets a maximum price above the market equilibrium price

Two evils of monopoly, A government purchase real GDP. Are increases in gov...

A government purchase real GDP. Are increases in government purchases associated with increases in real GDP?Describe the important characteristics of perfect competition and monopo

IS-curve in the AS-AD model, The IS-curve in the AS-AD model ...

The IS-curve in the AS-AD model The IS-curve is not affected by P in the AS-AD model We can define an IS-curve in the AS-AD model similarly to

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd