Question

INTERMEDIATE MACRO: PLEASE SUBMIT ALL ANSWERS WITH WORKING

Problem Set 3 Topic: Keynesianism 1. What is price stickiness? Why do Keynesians believe that allowing for price stickiness in macro analysis is important? 2. Describe four alternative responses available to policymakers when the economy is in recession. What are the advantages and disadvantages of each strategy? Please discuss the effects on employment, the price level, and the composition of output. What are some of the practical difficulties in using these stabilization policies to fight recessions? 3. Use the Keynesian model to explain the procyclical behavior of employment, money, inflation and investment. 4. According to Keynesian analysis, in what two ways does an adverse supply shock reduce output? What problems do supply shocks create for Keynesian stabilization policies? 5. According the Keynesian IS-LM model, what is the effect of each of the following on output, the real interest rate, employment and the price level? Distinguish between the short- run and long-run. a) Deregulation that allows banks to pay a higher interest rates on checking accounts b) A severe water shortages that causes sharp drops in agricultural output and increases in food prices

Answer 1

As per HOMEWORKLIB RULES first question is to be answered

Kindly ask rest of the questions in a separate post

1.

Price stickiness refers to a situation of nominal rigidity where in prices of goods and services in the economy do not fluctuate much and remain same even if the demand conditions change.

For eg the price of a high-end smartphone does not fall even if demand falls significantly

As per Keynes, this price rigidity is important in the economy to prevent it from falling into recession even if a minor inconvenience occurs. It delays the process of recession or economy tumbling down as stable prices do not allow recession or inflation to occur very easily and market forces of demand and supply adjust to rigid prices.