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

What is causing the rise in the price of oil, The rise in the price of oil ...

The rise in the price of oil can be traced to a easy factor, but there are various other contributing factors. The easiest explanation is that the demand for oil is greater than

interpret and explain the nmr spectrum, Treatment of Na2PdCI4 with 3-chlor...

Treatment of Na2PdCI4 with 3-chloro-2-methyl-1-propene under an atmosphere of CO yields the dimer [(11 3 - C 4 H 7 )PdClb (A). The 1H NMR spectrum of A at 298 K shows 3 signals: a

The effect of market for milk, 1a. Show on the market for milk the effect o...

1a. Show on the market for milk the effect of the introduction of BGH (bovine growth hormone). 1b. Show on the market for cheese the impact of what happened in the milk market.

Principal causes of high population growth, List and briefly describe the p...

List and briefly describe the principal causes of high population growth in developing countries and the major consequences.

Investment demand of the as-ad model, Q. Investment demand of the AS-AD mod...

Q. Investment demand of the AS-AD model? Investment demand. As long as we keep nominal interest rate (and thus real interest rates) constant, there is no reason for demand for

Calculate variable unit costs and total annual costs, How do you calculate ...

How do you calculate variable unit costs and total annual costs? Ans) Annual units sold, 1000. Raw materials yearly cost 650. Building rent yearly cost 9000. If sales volume enh

Illustrate neo-classical growth model, Q. Illustrate neo-classical growth m...

Q. Illustrate neo-classical growth model? The main purpose of another significant growth model, neo-classical growth model, is to explain how it is possible to have a permanent

National income of india, project with introduction,aims and objectives,nee...

project with introduction,aims and objectives,need and importance,preparation of data and information,case study,problems,conclusion

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