1. what aspect of the efficient wage in the market create unemployment? 2. accor

Question

1. what aspect of the efficient wage in the market create unemployment?

2. according to the keynesian model what determines the FE line (output) or level of output?

3. according to the Keynesian model how would an increase in labor supply affect employment?

4. why is price stickiness so important in the Keynesian analysis?

5. why do Keynesian economists see price stickiness in the monopolistic competitive business?

6. if there is an increase in the money supply what affect would there be on the following (increase, decrease, or remain the same for questions a to h):

a. The LM curve b. IS curve c. Aggregate Demand d. Output in the short run (Keynesian Model) e. Real interest rates (short run)

f. Employment g. Prices (long run) h. Output (long run)

7. how does the keynesian model differ from the classical model in the short run?

8. how does the Keynesian model differ from the Classical model in the long run?

Explanation / Answer

1. Efficiency wage is based on the concept that a higher wage will make labor more productive and efficient. However, in case of developed nations, higher the wages the lesser will be the number of people quitting their jobs. This would lead to an increase in the level of unemployment.

2. Level of aggregate demand determines the output in a keynesian model. Keynes assumes that the level of supply remains fixed in the short run, and hence the demand in the economy determines the output.

3. Changes in labor supply will not affect employment in the keynesian model.

4. Sticky prices are relevant as in the short run the prices do not adjust to restore equilibrium. This also means if the economy falls into recession or expands too quickly, then sticky prices will let it be at the current wage and price for a while

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