Unemployment - classical model / real-wage rigidity / money-wage rigidity

classical model and unemployment: in the goods market, Y = .....................

Y = A x L^alpha

Money-wage rigidity: why are workers rendered unemployed?

because at a given wage rate supply of labour exceeds demand for labour

classical model and unemployment: why do we stay at the same level of real wage?

because nominal wages and prices can instantaneously adjust to their equilibrium

causes of money wage rigidity: Money illusion: if additional employment can be created by lowering real wages, it is more practical to do so through what?

bringing about a rise in general price level rather than by cutting money wages.

Money-wage rigidity: money wage rigidity results in ............... unemployment of labour

involuntary

classical model and unemployment: firms choose labour which maximizes ............

profits

classical model and unemployment: given the shape of the AS curve, what happens when AD increases?

purely inflationary no change in output

classical model and unemployment: draw a diagram showing price and output

refer to ,,,,,,,

classical model and unemployment: everyone who wants to work can work. Draw a diagram showing the goods market

refer to ..

classical model and unemployment: draw three graphs (goods market, labour market, P/Y graph) to show real-wage rigidity

refer to....

Money-wage rigidity: draw the goods market, labour market and p,y graph to show money-wage rigidity

refer to.....

causes of money wage rigidity: Money illusion: keynes wrote 'whilst workers will usually resist a reduction of money wages, it is not their practice to withdraw their labour whenever there is a ....................

rise in the price of wage goods

classical model and unemployment: What happens to Labour and output?

same amount as before

classical model and unemployment: what is the optimal real wage rate in the labour market?

where labour demand = labour supply

causes of money wage rigidity: Money illusion: What is money illusion?

workers fail to realize that value of money, that is, its purchasing power in terms of commodities, changes when prices change. they regard money as something with stable value or purchasing power

causes of money wage rigidity: Money illusion: why do firms fail to cut wages despite an excess supply of labour?

workers will resist any move for cut in money wages though they might accept a fall in real wages brought about by a rise in prices of commodities.

causes of money wage rigidity: efficiency wages: explain

- high wages make workers more efficient and productive - adverse effect of lower wages on workers efficiency may explain the unwillingness to cut money wages despite excess supply of or unemployment of workers at higher money wages -

classical model and unemployment: Explain the process of monetary policy on price and output and the labour market

- increase in money supply, M increases - the demand function shifts up, AD increases (shown in the P,Y model) - in the labour market the increase in M causes nominal wages to rise - Price has also risen W1/P1 = W* = W2/P2 the real wage therefore stays at the same level of the real wage Y* stays the same

causes of money wage rigidity: wage fixation through contracts - explain

- wages can be fixed through contracts made with the workers for a year or 2 - there is little possibility of changing money wages fixed through contracts when the situation of either surplus labour or shortage emerges - trade unions of workers never accept wage cuts even if some of the union workers remain unemployed. thus, the sticky or rigid money wages lead to the existence of involuntary unemployment the labour market does not clear in the short run

causes of money wage rigidity: Money illusion: what are the 2 main reasons for money illusion?

1. Workers who are more concerned with their relative position with other workers will strongly resist the cut in their money wages, while they will not oppose so strongly their cut in real wages through rise in the general price level 2. workers blame their own employers for this, whereas they think a cut in real wages through rise in prices in general is outcome of the working of general economic forces over which strikes in an industry would have little effect.

Money-wage rigidity: why does the labour market not clear through a reduction in money wages? what are the 3 reasons for the stickiness of money wage rate?

1. money illusion 2. wage fixation through contracts 3. minimum wage laws

Money-wage rigidity: define money wage rigidity

downward inflexibility of money wages

classical model and unemployment: in the goods market, Y = A x L^alpha dy/dL = ...............................

dy/dL = alpha x A x L^alpha - 1

classical model and unemployment: in the goods market, Y = A x L^alpha dy/dL = alpha x A x L^alpha - 1 = ....................

dy/dL = alpha x A x L^alpha - 1 = MPL > 0

structural unemployment/ wage rigidity: real wages are above .................

equilibrium wage

causes of money wage rigidity: minimum wage laws - explain

fixing wage above equilibrium

classical model and unemployment: in the classical model what do we assume about prices?

flexible

classical model and unemployment: What happens to MPL as you increase Labour

it falls

classical model and unemployment: in the classical dichotomy, what has no effect?

monetary policy

price flexibility and money wage rigidity: Keynes' view of involuntary unemployment: in his contractual view, although it is assumed that prices are free to vary, the ........... is fixed

money wage

price flexibility and money wage rigidity: Keynes' view of involuntary unemployment: keynesians do not believe that money wage rate is completely fixed or sticky. What do they actually mean by sticky wages?

money wages do not fall quickly to bring demand for and supply of labour in equilibrium at full employment

classical model and unemployment: is monetary policy effective in the classical dichotomy?

no, real wage stays the same because nominal wage and prices move at the same pace.

structural unemployment/ wage rigidity: number of workers exceeds .................

number of jobs LS > LD

Money-wage rigidity: classical economists believed that money wage rate is ...............

perfectly flexible adjusts to bring demand for and supply of labour in equilibrium and keep the economy at full employment level

price flexibility and money wage rigidity: Keynes' view of involuntary unemployment: Keynes accepted the classical theory of labour demand according to which firms demand labour up to what point?

point at which real wage rate (money wage rate / price level, W/P) = marginal product of labour

classical model and unemployment: in its purest form it suggests that the ................. ensures all markets always clear

price (wage) adjustment

classical model and unemployment: Draw a diagram showing the labour market

price and output refer to ...

structural unemployment/ wage rigidity: Long term structural unemployment is most likely .................

structural

Money-wage rigidity: keynes believed what about the money wage?

that is would not change sufficiently in the short run to keep the economy at full employment

price flexibility and money wage rigidity: Keynes' view of involuntary unemployment: at a higher real wage rate, less amount of labour will be demanded. Keyne's theory of involuntary unemployed based on price flexibility and money wage rigidity suppose there is a leftward shift in the AD curve. price falls and output falls what happens to unemployment in the keynesian view?

the real wage increases - unemployment rises - smaller amount of labour will be demanded and employed by all firms in the economy - with the money wage rate remaining fixed at the level W0 and with flexible prices, the fall in aggregate demand results in persistent voluntary unemployment.

price flexibility and money wage rigidity: Keynes' view of involuntary unemployment: in the keynesian view, money wages are slow to adjust sufficiently to ensure full employment of labour when what occurs?

there is a decline in aggregate demand resulting in lowering of prices and products involuntary unemployment is a consequence.

Money-wage rigidity: what does does stickiness or rigidity of money wage imply about money wage rates?

they do not quickly change, especially in the downward direction to keep equilibrium at full employment level

classical model and unemployment: in the classical model, what is the shape of the AS curve?

vertical