ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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wages adjust rapidly and this causes prices to rapidly change as well.
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wages adjust slowly and this causes prices to rapidly change in compensation.
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wages adjust slowly and this causes prices to slowly change as well.
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wages adjust rapidly and this causes prices to slowly change in compensation.
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Detailed explanation-1: -New Keynesian advocates maintain that prices and wages are “sticky, ” meaning they adjust more slowly to short-term economic fluctuations. This, in turn, explains such economic factors as involuntary unemployment and the impact of federal monetary policies.
Detailed explanation-2: -Keynes interprets the relation between output and employment as a causative relation between effective demand and employment. He discusses what happens at full employment concluding that wages and prices will rise in proportion to any additional expenditure leaving the real economy unchanged.
Detailed explanation-3: -Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending-consumption, investment, or government expenditures-cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase.
Detailed explanation-4: -To Keynes, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; but unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labor-market flexibility.
Detailed explanation-5: -Keynes argued that prices and wages are not flexible as the classical theory asserts. Wages tend to be rigid on the down side because workers will not accept wages which do not permit them to live adequately; this is reinforced by the actions of unions. If wages are too low, unemployment will exist.