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W8A Outline

Dive into the complexities of Keynesian economics, from sticky wages to the Neo-Classical Synthesis, exploring the impact of various economic factors and models on market behavior and policy decisions.

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W8A Outline

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  1. W8A Outline • Keynesian Economics • Varieties of Keynesian Thought • Sticky Wages • Sticky Prices • Akerlof on Markets + Behavior

  2. Some Keynesian Economics Post Keynesian economics: following the master’s text and Method. (Better to be approximately correct than precisely wrong. Importance of crowd psychology and ideas rather than rationality.) Neo Classical Synthesis: The US shot-gun wedding between the Solow growth model and the IS-LM model. We assume that slow price changes and/or FRB monetary policy gets us to the Solow YP. Slow price changes and sticky wages assumed. New Keynesian Models Provide “micro foundations” for slow price adjustment and significant quantity adjustment in response to AD fluctuations.

  3. Why do sticky wages matter? w NS Real or Nominal? A fall in Y and Nd causes unemployment Nd Nd’ N Which Labor Market: Economy Wide, Industry, or Skill???

  4. Causes of sticky wages? 1: Min. Wage Law or Unions, but not much of that in USA 2: insider-outsider victimization, Akerloff p.415 insiders sabotage the inclusion of new workers (earning a lower wage) into the firm 3: ‘fairness’ Hicks p.64-69 The Crisis in Keynesian Econ. 1974 so the stickiness of wages due to fairness depends on such things as social structure and confidence in money. 4: ‘moral’ &`reciprocation’ Truman Bewley, Why Don’t Wages Fall During A Recession? 1999 p.430-1 5: efficiency wages, Text and Shapiro & Stiglitz

  5. Determination of the efficiency wage A higher wage brings forth more effort and less shirking by imperfectly observed workers. Determination of the efficiency wage

  6. Figure 11.02 Excess supply of labor in the efficiency wage model Excess supply of labor in the efficiency wage model Think of Ns as bodies in job, not effort. Why can’t effort be built into MPn? Only if comparisons and wage changes matter. E.g. efficiency wages based on comparative notions of fairness.

  7. effective labor demand curve Figure 11.03 The effective labor demand curve Just the production function Y=f(N, A constant, K constant) So how do we get YP?

  8. What is FE?What if M up? Since there is excess Ns YFE does not depend on Ns in any direct way. But a Strong expansion of the Economy would erode the Wage-gap, hence an ‘equilibrium’ Position. w N

  9. Figure 11.06 An increase in government purchases in the Keynesian AD-AS framework An increase in government purchases in the Keynesian AD-AS framework

  10. Sticky Prices Because of “menu costs”, supplier relationships and oligopoly? Modeled as a fraction of firms changing prices every period. When firm cuts price other firms follow. (market share) P MC D MR Q

  11. Liquidity Trap Box 11.2 A liquidity trap

  12. Keynesian ISLM The Keynesian version of the ISLM solves for equilibrium in the money and goods markets simultaneously. If the FRB moves the LM curve to the right place the economy will be at full employment. If there is a liquidity trap we need unorthodox monetary policy and/or fiscal policy.

  13. Keynesian 2 pt. model

  14. Akerlof Link on 306 page doesn’t work right. Takes you to Nobel Prize Home page. Search for Akerlof and download the address. Why not buy into the New Classical emphasis on fully rational expectations and fully rational optimizing behavior? Because Keynes was right! People act according to “cognitive bias, reciprocity, fairness, herding, and social status” Seek common ground with sociology + psychology.

  15. 6 things poorly explained by standard market optimization • Involuntary Ue, why can’t they get work by • Offering a slightly lower wage?(Sabotage) • Why does M policy have an impact? • Firms and workers focus on the important things. Small amounts of price stickiness in the face of inflation have small impact on individual firm profits, but the money has a large impact on sales.

  16. Prevalence of Undersaving • People regret not having saved more. • Undersaving happens despite gov. efforts. • Happens due to time inconsistency, hyperbolic discounting. • So let people lock in today, next year’s saving sacrifice for retirement.

  17. Akerlof • Failure of Deflation to accelerate. • After initial deflation in Great Depression the price level stabilized and Ue stayed high. Deflation did not get faster. Excess Volatility of Stock Prices. Keynes GT p. 154-156, (R. Shiller today) Self Destructive Underclass Akerloff last paragraphs.

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