Download Chapter 12

Chapter 12
Keynesian
Business Cycle
Theory: Sticky
Wages and Prices
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 12 Topics
• Construction of the Keynesian sticky wage
model: labor market, aggregate supply, IS and
LM curves, aggregate demand.
• Nonneutrality of money when wages are sticky.
• The Role of Government in the sticky wage
model.
• A Keynesian sticky price model.
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Figure 12.1 The Labor Market in
the Keynesian Sticky Wage Model
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Figure 12.2 The Labor Market in the
Keynesian Sticky Wage Model When
There Is Excess Demand
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Figure 12.3 Construction of the
Aggregate Supply Curve
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Figure 12.4 The Effect of an
Increase in W or a Decrease in z
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Figure 12.5 The IS Curve
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Figure 12.6 Money Demand,
Money Supply, and the LM Curve
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Figure 12.7 Determination of r
and Y Given P
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Figure 12.8 The Effect of an Increase
in the Money Supply on the LM Curve
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Figure 12.9 The Effect of an Increase
in the Price Level on the LM Curve
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Figure 12.10 A Positive Shift in Money
Demand Shifts the LM Curve to the
Left
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Figure 12.11 The Aggregate
Demand Curve
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Figure 12.12 A Shift to the Right in the IS
Curve Shifts the AD Curve to the Right
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Figure 12.13 A Shift to the Right in the
LM Curve Shifts the AD Curve to the
Right
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Figure 12.14 The Keynesian
Sticky Wage Model
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An Increase in the Money
Supply
• The LM curve and AD curve shift to the right.
• The real interest rate falls, the price level rises,
the real wage falls, firms hire more labor, real
output increases, consumption rises, investment
rises.
• Money is not neutral in the short run when
nominal wages are sticky.
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Figure 12.15 An Increase in the
Money Supply in the Sticky Wage
Model
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Table 12.1 Data vs. Predictions of the
Keynesian Sticky Wage Model with
Monetary Shocks
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Figure 12.16 Percentage Deviations
from Trend in the Money Supply and Real
GDP for the Period 1959–2006
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Table 12.2 Data vs. Predictions of the
Keynesian Sticky Wage Model with
Investment Shocks
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Figure 12.17 Real and Nominal
Interest Rates, 1934–2006
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Figure 12.18 An Increase in the Demand
for Investment Goods in the Sticky Wage
Model
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Figure 12.19 Long-Run
Adjustment of the Nominal Wage
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The Role of Government Policy
in the Sticky Wage Model
• Keynesian unemployment will be eliminated and
economic efficiency restored in the long run when
nominal wages adjust to equate supply and demand in
the labor market.
• In the short run, efficiency can be restored through
appropriate monetary or fiscal policy in the sticky wage
model.
• Monetary or fiscal policy needs to act quickly enough,
and given the right information, to have the predicted
effects.
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Figure 12.20 Stabilization Policy in the
Sticky Wage Model–Monetary Policy
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Figure 12.21 Stabilization Policy in the
Sticky Wage Model–Fiscal Policy
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Sticky Price Model
• Firms do not change their nominal prices in the
short run, as this is too costly.
• If demand rises, then firms satisfy this demand
by increasing output.
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Figure 12.22 The Keynesian
Sticky Price Model
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Equation 12.1
The quantity of employment N must be consistent
with the quantity of output Y and the production
function:
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Equation 12.2
Employment is then an increasing function of Y/z
and K.
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Figure 12.23 Determination of
Employment in the Sticky Price Model
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Figure 12.24 The Effect of an Increase in
Total Factor Productivity on Employment
in the Sticky Wage Model
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