Problem with the keynesian model, Macroeconomics

Assignment Help:

The problem with the Keynesian model

We can classify two problems with the Keynesian model as developed so far:

1. Π is exogenous. Although inflation may temporarily deviate from wage inflation, this deviation can't be too large and it can't last for too long (since real wages would become unreasonable low or unreasonable high). This model has no determination of Πw and hence no complete determination of Π. A model which predicts an inflation of around 6% by presuming a wage inflation of 6% isn't very useful. Keynesian model with inflation is hence incomplete.

2. It is quite unreasonable to presume that Πw would be independent of Y. More reasonable would be to model Π Was a positive function of Y. If we are in a boom, L would be above its average and unemployment below its average. In such a situation, it's reasonable to expect wage inflation to increase.

To solve these problems, we have to make Πw endogenous. We do this by Keynesian model adding the Phillips curve.


Related Discussions:- Problem with the keynesian model

Accredited similar dental offices, Should dental offices be accredited simi...

Should dental offices be accredited similar to the standards that hospitals are?

State the market for overnight loans, State the market for overnight loans ...

State the market for overnight loans Overnight interest rates are rates for loans over a single night - these are the shortest of all interest rates. During the day, banks norm

MR AND MC, EXPLAIN THE MR AND MC APPROACH FOR EQUILIBRIUM DETERMINATION OF ...

EXPLAIN THE MR AND MC APPROACH FOR EQUILIBRIUM DETERMINATION OF FIRM IN SHORT RUN.

Homework, Using a flexible exchange rate system with imperfect capital mobi...

Using a flexible exchange rate system with imperfect capital mobility explain the impact that an open economy has on the effectiveness of monetary and fiscal policy. 2. Using a fl

Explain about price inflation, Q. Explain about Price Inflation? The ma...

Q. Explain about Price Inflation? The major reason for allowing for non-constant wages in the model is that we then can allow for persistent deflation/inflation. With constant

Shortage graph, I am writing a macroeconomics commentary about a supply sho...

I am writing a macroeconomics commentary about a supply shock-induced inflation, can I include a shortage diagram I learnt in microeconomics and just change demand and supply to AD

What is collateral management, Collateral Management is a function to handl...

Collateral Management is a function to handle collateral effectively. It gives interface to enter collateral data, and it has a master data of collateral descriptions and types. It

What is the basic function of central banks, Q. What is the basic function ...

Q. What is the basic function of Central banks? A central bank is a public authority which is responsible for monetary policy for a country or a group of countries. Two signifi

How commercial banks create money, How commercial banks "create money" ...

How commercial banks "create money" Commercial banks obviously cannot influence the amount of currency in the economy or the monetary base, since they are not allowed to print

Fisher equation, using the fisher equation what can you infer about expecte...

using the fisher equation what can you infer about expected inflation in canada and in the united states?

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