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NOMINAL RIGIDITIES VERSUS REAL RIGIDITIES
Nominal rigidities are said to exist when nominal prices and wages do not change in the face of conditions that call for their change. As you have seen in earlier units, this will lead to Keynesian unemployment. But unemployment can also come about because of certain real rigidities in the economy. Such rigidities can exist in the goods market, the labour market or even the market for credit.
There could exist reasons why the real wage paid in the labour market is higher than the market-clearing wage. This will, of course, lead to unemployment of some of those who are willing to work at a lower (market-clearing) wage. We are not talking here about the nominal wage not changing when it needs to change, but about firms rationally and voluntarily deciding to pay higher real wages to their workforce because they find it to their advantage in some way. We will explain this concept of real rigidities better when we list out all such rigidities in Section 15.5 and the sub-sections therein. The New Keynesian economists stress both the nominal and real rigidities to explain the presence of booms and bust/ persistent unemployment in the real world.
Factors determining Elasticity of demand Ease of substitution. Nature of the commodity i.e. whether it is a necessity of life, luxury or addictive. Consumers
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