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

Aggregate demand and aggregate supply, Find one or more articles in the wal...

Find one or more articles in the wall street Journal or other business publications that describe changes in fiscal or monetary policies in the United States. Discuss how these pol

Macroeconomic Analysis, Derive the conditions for steady state in the Solow...

Derive the conditions for steady state in the Solow model. What are its implications? In what respects is the golden rule different from the steady state?

Industry''s long-run supply schedule, A perfectly competitive painted neckt...

A perfectly competitive painted necktie industry has a large number of potential entrants. Each firm has an identical cost structure such that long-run average cost is minimized at

Determine the economic functions of money, Determine the Economic functions...

Determine the Economic functions of money There are three functions of economics of money - A medium of exchange. - A unit of account - Store of value.

Describe exports and imports in as-ad model, Q. Describe Exports and import...

Q. Describe Exports and imports in AS-AD model? Exports and imports. This is more difficult to justify owing to exchange rate. Suppose that we have a flexible exchange rate a

Full economic price of this legislation, From California to New York, legis...

From California to New York, legislative bodies across the United States are considering eliminating or reducing the surcharges that banks impose on noncustomers, who make $14 mill

Advantages of leaving resource allocation, What are the advantages of leavi...

What are the advantages of leaving resource allocation to price allocation? Ans) The 5 benefits are Neutral, Flexible, Freedom of choice, No administrative cost and lastly Dimin

Impact of property crime to increase, Which of the following will cause pro...

Which of the following will cause property crime to increase? a) An increase in jail terms. b) A decrease in personal incomes. c) An increase in the probability of arrest.

Describe supply and demand in macroeconomics, Q. Describe Supply and demand...

Q. Describe Supply and demand in macroeconomics? In microeconomics, we are careful to distinguish between demand, supply and observed quantity. The first two are hypothetical c

Chartered a bus to atlanta, A group has chartered a bus to Atlanta. The dri...

A group has chartered a bus to Atlanta. The driver costs $200, the bus costs $500, and parking in Atlanta will be $90. You have already paid $700 to reserve the bus and a driver. T

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