New Keynesian Economics: Understanding Productivity, Wages, and the Aggregate Supply Curve, Assignments of Economics

Download New Keynesian Economics: Understanding Productivity, Wages, and the Aggregate Supply Curve and more Assignments Economics in PDF only on Docsity! Economics 3133-001 Dr. Reed University of Oklahoma Spring 2006 WEEK #5 ASSIGNMENT 1. Read Chapter 8 in Macroeconomics. 2. Read Handout #3: “The Effects of an Increase in the Economy’s Productivity According to the New-Keynesian (Static) Model.” Be prepared to answer the following questions in class: 3. Complete the following sentence: “Keynesians do not disagree with the predictions of the classical theory as a description of the long-run effects of a fall in the money supply. But they argue that the process by which the economy gets from one long-run equilibrium to another _______________________.” 4. Complete the following sentence: “In the new-Keynesian theory of aggregate supply, the quantity of output supplied slopes upward as a function of the price level because the nominal wage is assumed to be __________________.” 5. What does it mean to say that the “nominal wage is assumed to be sticky?” What is meant by “sticky?” 6. What point is Figure 8.1 on page 196 being used to make? 7. Explain the following statement in the text: “Efficiency wage theory [alone]…cannot explain why the aggregate supply curve slopes upward.” (HINT: According to efficiency wage theory, if the price level (P) rises, what happens to the efficiency wage (w/P)? What happens to equilibrium employment?) 8. What is the distinction between “real wage rigidity” and “nominal wage rigidity?” 9. What is the “contract theory of wages?” How is it able to explain “nominal wage rigidity?” 10. What point is Panel B in Figure 8.2 on page 198 being used to make? 11. In Panel B of Figure 8.2, when the price level decreases from P1 to P3, why do firms decrease their profit-maximizing level of employment? Why don’t they just decrease the nominal wages that they pay in order to get the efficiency wage back to its pre-price decrease level? 1 12. In Panel A of Figure 8.2, when the price level increases from P1 to P2, why do firms increase their profit-maximizing level of employment? Why don’t they just increase the nominal wages that they pay in order to get the efficiency wage back to its pre-price increase level? 13. What point is Figure 8.3 on page 199 being used to make? In plain English, explain why the short-run “Aggregate supply” slopes upward? 14. What would the short-run “Aggregate supply” curve look like in the case of efficiency wages without stickiness in nominal wages? (NOTE: This is a “think” question. You will not find it explicitly discussed in the text.) 15. Question 14 addresses the question of why we need “nominal wage stickiness” to generate an upward-sloping aggregate supply curve in New Keynesian theory. Why do you think it is necessary to also have “efficiency wages?” In plain English, explain why “nominal wage stickiness” is not sufficient by itself to generate an upward-sloping aggregate supply curve. (NOTE: This is a “think” question. You will not find it explicitly discussed in the text.) 16. What is the connection between Figures 8.2 and 8.3? 17. What point is Figure 8.4 on page 201 being used to make? 18. Can you see how Figure 8.4 on page 201 can be used to motivate the existence of a business cycle? (NOTE: This is a “think” question. You will not find it explicitly discussed in the text.) 19. The “New Keynesian Theory” explains how market forces determine the equilibrium values of (i) the real wage (w/P), (ii) employment (L), (iii) real output (Y), and (iv) the price level (P). Be prepared to explain how the different panels of Figure 8.5 on page 203 represent how these respective variables are determined. HINT: Start from Panel D and work your way up to Panel A. What is the purpose of Panel B? 20. Figure 8.5 on page 203 shows the short-run impact of a decrease in the money supply ( SM ) on the (short-run) equilibrium values of (i) the price level (P), (ii) the real wage (w/P), (iii) employment (L), and (iv) real output (Y). You should be able to figure out the effect on (v) the nominal wage (w). 20A. Be prepared to explain in plain English why a decrease in the supply of money has these effects. 20B. In following the various impacts of a contraction in the money supply in Figure 8.5, should one start from Panel D and work one’s way up to Panel A? Start from Panel A and work one’s way down to Panel D? Be prepared to explain your answer. 2