New Keynesian Economics is a modern twist on the macroeconomic doctrine that evolved from classical Keynesian economics principles. d. it is drawn holding price level constant. Keynes argued that, if workers in general were to accept lower money wages, the overall price level could not possibly remain unchanged. Price above equilibrium. Because wages and prices are sticky and because the economy gets stuck, Keynes said that the government needed to step in and do something to help the economy out. Around 15% of wage changes are wage cuts, around 40% of price changes are price cuts. Empirical evidence on the extent, causes and consequences of wage rigidity on the individual level is relatively scant, however. However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). At a price of P2, the supply is greater than demand, meaning firms have excess stock they cannot sell. This study found wage stickiness is more pronounced than price stickiness. This causes the growth rate of consumption and the growth rate of investment to fall. it is a result of the stickiness or inflexibility of some prices and wages. The price level, in turn, depended on money-wage bargains made between many different groups of workers and employers across the economy as a whole. However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). Firms may pay wages above the market-clearing wage to ensure hard work from its employees and to hold on to their work. In other cases, the price may be set above the equilibrium price – leading to excess supply and a surplus. Unformatted text preview: Question 1 All of the following statements are true about the short-run aggregate supply curve except Select one: a. it is a graphical representation of the relationship between production and the price level.b. This Feature To see how nominal wage and price stickiness can cause real GDP to be either above or below potential in the short run, consider the response of the economy to a change in aggregate demand. As well as wages being sticky, prices can be sticky. By combining stickiness with problems of co­ordinating, this theory can explain the cause of wage stickiness. Real prices … Though, prices do tend to be more flexible than wages. Sticky prices are prices that do not adjust immediately to changing economic conditions. Assume that at this initial point, the growth rate of the money supply is 5%, the growth rate of the velocity of money is 0% and inflation is 1%. 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