Keynesian macroeconomics Essay Example | Topics and Well Written Essays - 1000 words

Keynesian macroeconomics - Essay ExampleHowever, large changes in gettable technology, especially regression is very difficult to support (Summers, 1986).Second, erythrocyte theory assumes that fluctuations in employment resound changes in the amount people want to work. Because employment fluctuates substantially while the determinants of labour supply - touchable wage and the reliable interest rate - vary only slightly, these models require that leisure be super substitutable over time. This assumption conflicts with m some(prenominal) studies (for example, Altonji, 1986) it also conflicts with the belief that high unemployment in recessions is largely in volunteer.Third, real championship cycle theory assumes that monetary policy is irrelevant for economic fluctuations, this challenges the Keynesian argument that any correlation of money with output arises because the money supply is endogenous (King and Plosser, 1984). Very little evidence supports this theory.A different a pproach to the business cycle is the sectoral shift theory, which emphasizes the costly adjustment of labour among sectors (Lilien 1982, Black 1987). gibe to this theory movement of labour from one sector to a nonher occurs in response to market fluctuations and recessions ar periods during which there are more sectoral shocks and thus a greater need for sectoral adjustment. If this were to be true we would hold on high unemployment accompanied by high job vacancies during a recession - this is not correct (Abraham & Katz, 1986). In fact the measured movement of workers is opposite i.e. very low during recession (Murphy & Topel, 1987).Advocates of the sectoral shift theory indicate that it is possible that since the process of sectoral adjustment requires a period of high unemployment and low income, it lowers the demand for the products of all sectors. Thus, we cogency observe low vacancies and low movement during recessions, even if recessions are initially caused by the need to allocate labour among sectors.In this form, it is not clear how to distinguish empirically the sectoral shift theory from real business cycle theories that emphasize economy-wide fluctuations in technology or Keynesian theories that emphasize fluctuations in aggregate demand.The moot over the RBC theory boils down to four issues1. Do changes in employment reflect voluntary changes in labour supply2. Does the economy experience large exogenous productivity shocks in the unequal run3. Is money really neutral in the short run4. Are wages and prices ductile in the short run Do they adjust quickly to keep supply and demand in balance in all marketsSatisfactory answers have not been found to these questions within the framework of the RBC theory.New Keynesian MacroeconomicsThe single theme that identifies Keynesian economics is the belief that economic fluctuations do not reflect the optimal response of the economy to changes in tastes and technology, but some sort of market cala mity on a large scale. The market imperfection that recurs most frequently in Keynesian theories is the trouble of wages and prices to adjust instantly to equilibrate supply and demand. The short-run