ure neoclassical Blanchard & Mever Kevnes & Kalecki: Wage and price Actual Y may
ID: 1151378 • Letter: U
Question
ure neoclassical Blanchard & Mever Kevnes & Kalecki: Wage and price Actual Y may not- Y is determined by aggregate demand flexibility and having all potential Y (which is called (AD). Ymoves due to investment Y) in the short-run due to cycles and policy actions. Wages and inertia in changes in wages prices, or their rates of change, may saving spent on investment gets the economy to the full emplovment level of national income (Y) Inflation(?) is due to money growth exceeding output growth. and prices be sticky, but the only thing that has an effect on Y is mark-up rigidity If Y> Yn, we will have accelerating inflation (,but moves with AD as that affects | | The price level is determined by costs demand-determined prices which feed into costs which leads to monev wage increases, etc Tt-1 We should use monetaryFiscal and monetary policy should policy to try to get to Y-fight unemployment, but this will lead y, and ?-?? (the inflation target) in the medium-run,inflation will cause unemployment to inflation, and then fighting even though getting there is not easy and is going to take some time What is given in columns 2 and 3 above? That is, tell why the ideas proposed by Blanchard and Meyer, one the one hand, and by Keynes and Kalecki, on the other hand, give us the results found in each cell in columns 2 and 3Explanation / Answer
In the columns (2) and (3) above, the nature of output, inflation and unemployment is given according to Blanchard & Meyer and Keynes & Kalecki. The columns give their interpretation of how output is produced in a country and how inflation and wages are determined in the economy.
According to Blanchard and Meyer, the actual output is not equal to the potential output in the short run primarily because of the inertia and flexibility in changes in wages and prices. As, wages and prices change, it not only affects the nominal output but also the real output by impacting the real demand of the economy. When the actual output is above potential output, then there accelerating inflation mostly due to price intertia i.e increase in price because of past increase in price. The economy then should get to the equilibrium values of output and inflation in the medium-term using monetary policy. This is because, the ouput is mostly impacted by price and wage inertia and monetary policy has a much more direct impact on inflation than fiscal policy. Hence, monetary policy is used to reach the potential output and target inflation.
According to Keynes & Kalecki, the output is determined by investment cycles and policy actions. According to them, prices and wages in the short run might be sticky but what really affects the output is the price mark-up rigidity. The prices are mostly determined by the costs due to rigid markups, but it also moves with the aggregate demand as due to higher demand, wages increase which feeds nto the prices as cost. This leads to increase in price level or vice versa. They also say, fiscal and moetary policy should be ussed to fight unemployment but this will lead to inflation. This is because there is always a trade-off between unemployment and inflation.
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