Upload
samuel-pratt
View
230
Download
0
Tags:
Embed Size (px)
Citation preview
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 12
Keynesian Business Cycle Theory: Sticky Wages and Prices
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-2
Chapter 12 Topics
• Construction of the Keynesian sticky wage model: labor market, aggregate supply, IS and LM curves, aggregate demand.
• Nonneutrality of money when wages are sticky.
• The Role of Government in the sticky wage model.
• A Keynesian sticky price model.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-3
Figure 12.1 The Labor Market in the Keynesian Sticky Wage Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-4
Figure 12.2 The Labor Market in the Keynesian Sticky Wage Model When There Is Excess Demand
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-5
Figure 12.3 Construction of the Aggregate Supply Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-6
Figure 12.4 The Effect of an Increase in W or a Decrease in z
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-7
Figure 12.5 The IS Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-8
Figure 12.6 Money Demand, Money Supply, and the LM Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-9
Figure 12.7 Determination of r and Y Given P
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-10
Figure 12.8 The Effect of an Increase in the Money Supply on the LM Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-11
Figure 12.9 The Effect of an Increase in the Price Level on the LM Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-12
Figure 12.10 A Positive Shift in Money Demand Shifts the LM Curve to the Left
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-13
Figure 12.11 The Aggregate Demand Curve
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-14
Figure 12.12 A Shift to the Right in the IS Curve Shifts the AD Curve to the Right
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-15
Figure 12.13 A Shift to the Right in the LM Curve Shifts the AD Curve to the Right
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-16
Figure 12.14 The Keynesian Sticky Wage Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-17
An Increase in the Money Supply
• The LM curve and AD curve shift to the right.
• The real interest rate falls, the price level rises, the real wage falls, firms hire more labor, real output increases, consumption rises, investment rises.
• Money is not neutral in the short run when nominal wages are sticky.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-18
Figure 12.15 An Increase in the Money Supply in the Sticky Wage Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-19
Table 12.1 Data vs. Predictions of the Keynesian Sticky Wage Model with Monetary Shocks
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-20
Figure 12.16 Percentage Deviations from Trend in the Money Supply and Real GDP for the Period 1959–2006
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-21
Table 12.2 Data vs. Predictions of the Keynesian Sticky Wage Model with Investment Shocks
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-22
Figure 12.17 Real and Nominal Interest Rates, 1934–2006
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-23
Figure 12.18 An Increase in the Demand for Investment Goods in the Sticky Wage Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-24
Figure 12.19 Long-Run Adjustment of the Nominal Wage
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-25
The Role of Government Policy in the Sticky Wage Model
• Keynesian unemployment will be eliminated and economic efficiency restored in the long run when nominal wages adjust to equate supply and demand in the labor market.
• In the short run, efficiency can be restored through appropriate monetary or fiscal policy in the sticky wage model.
• Monetary or fiscal policy needs to act quickly enough, and given the right information, to have the predicted effects.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-26
Figure 12.20 Stabilization Policy in the Sticky Wage Model–Monetary Policy
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-27
Figure 12.21 Stabilization Policy in the Sticky Wage Model–Fiscal Policy
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-28
Sticky Price Model
• Firms do not change their nominal prices in the short run, as this is too costly.
• If demand rises, then firms satisfy this demand by increasing output.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-29
Figure 12.22 The Keynesian Sticky Price Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-30
Equation 12.1
The quantity of employment N must be consistent with the quantity of output Y and the production function:
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-31
Equation 12.2
Employment is then an increasing function of Y/z and K.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-32
Figure 12.23 Determination of Employment in the Sticky Price Model
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 12-33
Figure 12.24 The Effect of an Increase in Total Factor Productivity on Employmentin the Sticky Wage Model