Problem with the keynesian model, Macroeconomics

Assignment Help:

The problem with the Keynesian model

We can classify two problems with the Keynesian model as developed so far:

1. Π is exogenous. Although inflation may temporarily deviate from wage inflation, this deviation can't be too large and it can't last for too long (since real wages would become unreasonable low or unreasonable high). This model has no determination of Πw and hence no complete determination of Π. A model which predicts an inflation of around 6% by presuming a wage inflation of 6% isn't very useful. Keynesian model with inflation is hence incomplete.

2. It is quite unreasonable to presume that Πw would be independent of Y. More reasonable would be to model Π Was a positive function of Y. If we are in a boom, L would be above its average and unemployment below its average. In such a situation, it's reasonable to expect wage inflation to increase.

To solve these problems, we have to make Πw endogenous. We do this by Keynesian model adding the Phillips curve.


Related Discussions:- Problem with the keynesian model

Two banks for financing, You decide to buy a home for $1,000,000. You appro...

You decide to buy a home for $1,000,000. You approach two banks for financing. The first requires a 10% down payment and requires monthly payments on a 20 year mortgage sufficient

Product information to consumers, Should the government increase, decrease ...

Should the government increase, decrease or remain the same in its level of intervention when it comes to mandating that companies provide product information to consumers? What ha

Unemployment, Find the labor force, the working-age population, the number ...

Find the labor force, the working-age population, the number of employed workers, and the number of unemployed workers. Unemployment rate 5.60 % Participation rate 62.50

Senator is considering tax, You are an assistant to a senator who chairs an...

You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on telecommunication services. Based on your research, AT&T has spent over $15 million on relate

Overnight target rates and inflation, Overnight target rates and inflation ...

Overnight target rates and inflation One of the major targets of every central bank is a low and stable inflation. Its main control variable is the overnight interest rate tar

Question, The greater the number of different goods available in an economy...

The greater the number of different goods available in an economy, Question 1 options: a) the less likely it is that a double coincidence of wants will exist, and the less likel

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd