DSME3080 Macroeconomics

for Managers

Keynesianism: The Macroeconomics theoy

aisumeP
品

of Wage and Price Rigidity classncal

Rao Fu
Spring 2023
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ask
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1
 Real-Wage Rigidity
 Wage rigidity is important in explaining
⼀

—
unemployment w

-
^
 Some reasons for real-wage rigidity
wea

—
→

 Minimum wage and labor unions

CHeuyFord
 Efficiency wage iay ar
Pndinny
万當化比可但

=
P
位

alrgl
] ; ,
wH 反⽽ ↓ nanawal
 Workers who feel well treated will work harder and more
efficiently (the "carrot"); this is Akerlof's gift exchange motive
 Workers who are well paid will not risk losing their jobs by
被炒 shirking (the "stick")
—

 "carrot + stick“: worker's effort depends on the real wage

2
Determination of the Efficiency Wage

fnem
slopes
"

(
∵ ⼈
∵

3
Excess Supply of Labor in the Efficiency Wage Model )

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了 ? ⼀ dlbruil toGnd
Lhy Unemploymenlee ↳ mure
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Q :
Deny easnn ,

uical Cabo d in
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) ∴ w ↓
procy Jry
=
a
level ns
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flabov CN (

⽽且 no .

G
Surplus
⼀
票

4
Efficiency Wages and the FE Line
 The FE line is vertical, as in the classical model, since
full-employment output is determined in the labor
market and doesn't depend on the real interest rate

 But in the Keynesian model, changes in labor supply

don't affect the FE line, since they don't affect
equilibrium employment
FEIle )
Couly faulr
thal o ND uMI 1 0

 A change in productivity does affect the FE line, since

it affects labor demand

5
 Price Stickiness
to )

Pnu is the tendency of prices to adjust

o
⼀

s slow

 Price stickiness
slowly to changes in the economy
迎 器
“
) ucuf
( ∴ nol
Mu = 3 cMeaper ⼼
∴ 當通脹 reall rHlakm
s
mmore
mintP
cutomer (4
hull fmduu
gou

 Sources of ⼆
price stickiness
… …

 Monopolistic competition and menu costs

 Empirical evidence

6
The Effective Labor Demand Curve

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are

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7
Monetary and Fiscal Policy in the Keynesian Model

 The Keynesian FE line differs from the classical model

 - Changes in labor supply don't affect the FE line in the Keynesian
model

 Since prices are sticky in the short run in the Keynesian

0
model, the price level doesn't adjust to restore general
caunwl

equilibrium ( Myfasl )
 Keynesians assume that when not in general equilibrium, the
economy lies at the intersection of the IS and LM curves, and may
be off the FE line

8
An Increase in the Money Supply
②

⑧ ①

0
the N
emplyed ,

P
side
only
alfeonobydemand
、
⼀
吃

9
 sycupd

An0 →
Increase in Government Purchases

⼈器
dassncal :
②

Purcuan J
goverumenl NP
)

G ( ( SR euimbmum )

taxes ↑ )
∴ NS ↑→ FEnengur

)
时
fulane
( cumenr
or

i比
dana
manch G
DPP )、

GP √
tryto dana 的定个
1

γ7

real ② ①

①
时
0 吃

10
The Keynesian Theory of Business Cycles
 Keynesians think aggregate demand shocks are the
primary source of business cycle fluctuations

 Aggregate demand shocks are shocks to the IS or LM

curves

 A recession is caused by a shift of the aggregate

demand curve to the left, either from the IS curve
shifting down, or the LM curve shifting up

11
 The Keynesian Theory of Business Cycles
 The Keynesian theory fits certain business cycle facts
 There are recurrent fluctuations in output
 Employment fluctuates in the same direction as output
←

udmu  Money is procyclical and leading

—

和 nam Investment and durable的goods spending is procyclical

and volatile ( (&) dnam
都要⽤
non
.

川↑
;

 Inflation is procyclical and lagging

 Procyclical labor productivity and labor hoarding
否
canm
dnrunny
"

key
(

12
Macroeconomic Stabilization
 Keynesians favor government actions to stabilize the
economy
⼀

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) pt imousetay

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,

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g
pouncg]

↑ us

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( CR eqmnnnnm
E
0 = ) PI .

expauswnay FcalPM

,
I

ou
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13
Macroeconomic Stabilization
 Macroeconomic stabilization is the use of monetary
and fiscal policies to moderate the business cycle; also
called aggregate demand management

 In practice, macroeconomic stabilization hasn't been

terribly successful yuu
0
to un knon how
far fomUR
freud
the exarr
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mpan of poiy cf dpension
kuow upc )
do
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V Husshn 已 Pa >
:

_ )

⼀
)
( pony
=

③ time lof
 These problems suggest that policy should not be
。
used to "fine tune" the economy, but should be
used to combat major recessions

14
Supply Shocks in the Keynesian Model
⽣以的收
⼀

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)

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0

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15
Readings
 The economics of COVID-19 pandemic: A survey
 https://www.sciencedirect.com/science/article/pii/S031
3592621000321

 The DSGE Model Quarrel

 https://www.bruegel.org/blog-post/dsge-model-
quarrel-again

16