Transcript The New-Keynesian Theory of Aggregate Supply Chapter 8

Chapter 8
The New-Keynesian Theory
of Aggregate Supply
Introduction
•
-
Great Depression
Classical Model
The neutrality of money
Vertical AS
- New-Keynesian Model
- Sticky Price
- Upward Slopped AS
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The Classical and New-Keynesian Theories
of Aggregate Supply Compared
Figure 8.1A
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The Classical and New-Keynesian Theories
of Aggregate Supply Compared
Figure 8.1B
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The Theory of Nominal Rigidity
• Two approaches:
- The menu cost approach
- The contract theory of wages
Rigid nominal wages (This Chapter)
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The Theory of Sticky Wages
• The new-Keynesian theory of AS begins with
the efficiency wage model and adds to it,
assuming that the nominal wage is chosen less
frequently than employment.
• Employment contract  The aggregate real
wage may differ from the efficiency wage over
long periods of time.
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Unemployment and the Price Level
when the Nominal Wage is Sticky
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How Changes in the Price
Level Affect Employment
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How Changes in the Price
Level Affect Employment
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Aggregate Supply and the Price Level
when the Nominal Wage is Sticky
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The New-Keynesian Theory
of Aggregate Supply
Figure 8.3
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Okun’s Law
• Okun’s Law says that when unemployment
increases by 1 percentage point, GDP will fall
3% below trend.
• See BOX 8.2
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From the Short Run to the Long Run
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Getting from the Short
Run to the Long Run
Figure 8.4
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The New-Keynesian Model and the
Non-Neutrality of Money
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The Non-Neutrality of Money in the
Keynesian Model
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Should We Stabilize the Business Cycle
• The Real Business Cycle School
- Most recessions are generated by fluctuations
in the natural rate and that the mechanism that
restores equilibrium is very fast.
• Keynesians:
- Some business cycles are not caused by
changes in technology like the Great
Depression.
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Homework
Question 4, 6, 7, 8
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