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

Input combination if the price of capital decreased, In reference to the ab...

In reference to the above question, assume you know the combination of inputs that minimizes cost. What would happen to this input combination if the price of labor increased? What

Production possibilities curve, Using a production possibilities curve, an ...

Using a production possibilities curve, an economy that produces an output combination less than the maximum possible is depicted by a point located. a. at the top corner of the

Quote., trying to figure out how this works as I have two classes currently...

trying to figure out how this works as I have two classes currently statistics/economics an

Economic assesment, can you tell me how this works, i am struggling to writ...

can you tell me how this works, i am struggling to write my report in economics and i would like to know how much does it cost some help

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

What is the remaining wip for wc, Below is a simple/familiar (I hope) works...

Below is a simple/familiar (I hope) worksheet for the "Dice Game".  Answer the following questions given the data for the each Work Center's scheduled production:

Wto negotiations, WTO Negotiations: As is obvious from the above expla...

WTO Negotiations: As is obvious from the above explanation  that India has favoured multilateral trade reforms ever since the time of GATT (1947) to WTO (1995). Currently WTO

Difference between project proposal and project feasibility , Project feasi...

Project feasibility study is needed to make a decision whether the project proposal is technically and economically possible. After finalization of the project feasibility report b

What is difference between explicit cost and implicit cost, What are the di...

What are the difference between explicit cost and implicit cost? Both are concerns to Opportunity Cost and Decisions: An explicit cost is a cost which involves essentially

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