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

Money, what effect would a rise in the velocity of money have on output, em...

what effect would a rise in the velocity of money have on output, employment and price level?

Increase in income, How does an increase in income affect a consumer's budg...

How does an increase in income affect a consumer's budget line and their total utility?

BUS668, Prepare calculations and a one to two page analysis, following the ...

Prepare calculations and a one to two page analysis, following the APA guidelines, that addresses the following: Assuming that the expectations theory is the correct theory of the

Automatic stabilizer, what is automatic stabilizer, example with diagram or...

what is automatic stabilizer, example with diagram or graph please

Important for policymakers, Why is it important for policymakers to conside...

Why is it important for policymakers to consider both the direct and indirect effects of public policies?

Determination of factor prices by supply and demand, DETERMINATION OF FACTO...

DETERMINATION OF FACTOR PRICES BY SUPPLY AND DEMAND   Let us suppose that perfect competition prevails in the goods and the factor markets. In such a situation let us see how th

Survivor Island, the central economic problem facing the group of survivors...

the central economic problem facing the group of survivors

Difference between accounting profit and economic profit, What is the diffe...

What is the difference between accounting profit and economic profit? Accounting Profit: The accounting profit of a business is the revenue of business minus the explicit

Classical labour market, effects of a real wage existing in the market that...

effects of a real wage existing in the market that is lower than the equillibrium real wage. what will eventually happen in this labour market if it is perfectly competitive

NATIONAL INCOME VARIATION, give and explain the different causes of nationa...

give and explain the different causes of national income variation

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