Question

In a Keynesian economy, if AD fell as in #3, would wages fall? Would employment remain near full employment?

Answer 1

So, I pretty much have this, except for the last part. Keynesian always gets to my head and over think things, anyone want to help with the last part of the question?

Answer 2

So, this is what I was thinking; feel free to bash me if I'm incorrect, help is appreciated.

In a Keynesian Economy, if AD falls (decreases) like in the problem, wages will decrease. Wages are "sticky" in a Keynesian Economy and will result in nominal wages remaining higher. If reduction of AD happens, there will be a decrease in the demand for labor. Workers will not increase supply of labor, and will insist on working for previous wage. Shown in the graph, as a conclusion, nominal wages will lower, a lower in real wage, and a lower in equilibrium quantity of labor, which means there is excess unemployment in the economy. So, no, employment will not remain near full employment, because it will decrease.

Answer 3

I am not really familiar with the keynesian model so I can't answer your question regarding this issue; however, in the table, why do we remain at full employment even after the shift of the AD curve to the left? Labor was reduced and we are still at full employment, this seems contradictory.

Answer 4

Umm, the graph is depicting a "Classical" economy. Within a classical economy there are assumptions, one of which is, if I'm correct from the readings, is Say's Law, "supply creates its own demand." An economy at full employment means workers want to spend their income on other goods and services. workers will realize prices are falling, and will accept a lower wage rather than unemployment. Workers are willing to supply the same quantity of labor at lower wages this is an increases supply. Nominal wage will fall, but the quantity of labor will remain at or full employment.