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

Problems of measuring productivity in actual work situations, Discuss the p...

Discuss the problems of measuring productivity in actual work situations. Also how productivity might be measured for each of the following industries? Finance and insurance (examp

Resulting market distortion, Consider a market for fish whose market demand...

Consider a market for fish whose market demand and market supply for fish are specified as Qd = 300 - 2.5 P and Qs = - 20 + 1.5 P respectively. The government decides to impose a p

Monetrary policy, draw a diagram that explains how interest rate sare deter...

draw a diagram that explains how interest rate sare determined in the keynesian macroeconomic model

Find the nash equilibria, Two people are engaged in a joint project. If eac...

Two people are engaged in a joint project. If each person i puts in the effort x i , the outcome of the project is worth f ( x 1, x 2). Each person's effort level x i is a

Illustrate opportunity cost of producing extra units, If the opportunity co...

If the opportunity cost of producing extra units of one good (expressed in terms of the amount of another good that is sacrificed) remains constant, then the shape of the productio

Describe keynesian cross model, Q. Describe Keynesian cross model? Keyn...

Q. Describe Keynesian cross model? Keynesian cross model is a simple version of what we call the 'complete Keynesian model' or simply the Keynesian model. Keynesian model has a

Multipliers, what is difference b/w dynamic and static multiplier

what is difference b/w dynamic and static multiplier

Adf test, Table Summary of results from the ADF test ...

Table Summary of results from the ADF test Test Number Oil GDP Interest rate Inflation Unemployment Exc

Credit creation, Deposit K4000, liquid asset k1000, loans K4000. what is cu...

Deposit K4000, liquid asset k1000, loans K4000. what is current liquid asset?

Relate overnight interest rates with interest rates, Relate overnight inte...

Relate overnight interest rates with interest rates By controlling overnight interest rates, the central bank will affect the interest rates with longer maturity. The reason f

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