Essay
ECS4861 ASSIGNMENT 3 SOLUTIONS (SEMESTER 2) 2024( FROM PRESCRIBED BOOK MATERIALS) //wa.me/
- Course
- Institution
ECS4861 ASSIGNMENT 3 SOLUTIONS (SEMESTER 2) 2024( FROM PRESCRIBED BOOK MATERIALS) //
[Show more]
Seller
Follow
ruvarashebango
Reviews received
Content preview
ECS4861 ASSIGNMENT 3 2024 S2, 1|Page
a) Evaluating Wage and Price Rigidity in Keynesian Economics
Keynes’s General Theory
Understanding Involuntary Unemployment
John Maynard Keynes’s General Theory of Employment, Interest, and Money (1936)
posits that involuntary unemployment arises when the aggregate demand for goods
and services is insufficient to fully employ all individuals willing to work at current
wage rates. Keynes argues that unemployment results from a lack of effective
demand rather than from rigidities in wages or prices. For instance, during the Great
Depression, Keynes observed that despite potential downward adjustments in
wages, unemployment remained persistently high. This observation supports the
notion that insufficient aggregate demand, rather than wage rigidity alone, was the
primary driver of unemployment (Keynes, 1936).
Impact of Wage and Price Rigidity
Keynes acknowledged that wages could be "sticky," meaning they do not easily
adjust downward, which could contribute to unemployment. This stickiness might
occur due to factors like labor contracts, minimum wage laws, and social norms
which resist wage cuts. For example, during the 1930s, many businesses were
reluctant to lower wages due to the potential negative impact on worker morale and
productivity, even though this flexibility might have theoretically reduced
unemployment.
However, Keynes’s central argument focuses on the insufficiency of aggregate
demand rather than rigidities per se. Price rigidity, where prices do not adjust quickly
to changes in supply and demand, can also affect unemployment by preventing the
economy from adjusting to shocks. For instance, if prices are sticky and do not fall in
response to decreased demand, businesses may cut back on production and lay off
workers, exacerbating unemployment. This phenomenon was evident during periods
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ruvarashebango. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.63. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
80364 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now