Please Read instructions, Before you Write!!:)
THERE ARE THREE QUESTIONS: 1st one is about Keynesian
and 2nd & 3rd problems are based on the articles attached.
here is the instructions!!
Send three files, a separate file with the answer to each
question, labeled with your ID number followed by _MT1, _MT2, and _MT3.
This assignment consists of three questions, equally weighted for grading. Fully answer
each question with a short “mini essay” of several paragraphs. While there is no strict
length limit, make sure that every aspect of your answer relates directly to the question.
It is unlikely that you will need more than 1,800 words, in total, for all three essays to
provide focused and complete answers.
As usual, you should pay careful attention to the sentence structure, clarity, precision, and
logical coherence of your writing. Make sure you write a first draft of all your answers
and then revise them after some time has passed. There will be no revision grades on this
assignment. Polish your writing carefully before you hand in your assignment. As you
learned from the classical model assignment, careful editing can significantly increase the
efficiency of communication. Redundancy or discussion of irrelevant details will affect
your grades on these essays. You demonstrate that you have learned an idea well when
you can explain it clearly with focus on the central issues
The target audience is other students in the class. Therefore, you may use common terms
or notation from our class discussions without detailed definitions. Make sure, however,
that you present the logic of your analysis in enough detail that your peers could fully
understand what you write.
Your primary source for material to complete this assignment is our class discussions. I
encourage you, however, to refer to the three “theory
” readings on the course web site.
Parts of all of these articles are directly relevant to the questions. A few choice
quotations from references might support arguments in your mini-essays. Also, two of
the questions ask you to refer to blog or news articles attached to this assignment.
1. We have considered two different perspectives on the cause of unemployment. To
reconcile new classical theory
with the dramatic rise in unemployment during the Great
Recession we explored friction and mismatch models. Keynesian theory
reduced spending leads to unemployment. Answer the questions below that compare
these two ways of understanding unemployment.
a) Briefly compare the source of unemployment in the two models. What key
assumption (or assumptions) lead to the differences?
b) In what sense is the unemployment explained by the two models voluntary or
c) Discuss how the effects of monetary policy on unemployment differ between the two
d) What evidence is helpful in distinguishing the relevance of the two models for
understanding current high unemployment?
2. As the Great Recession has unfolded since the end of 2007, journalists and some
economists have paid more attention to the Keynesian
“paradox of thrift” idea. Here is a
New York Times blog post from Paul Krugman that lays out a paradox of thrift argument.
August 26, 2010, 9:38 AM
We’re Still In A Paradox Of Thrift World
This morning Bloomberg has a story about how business investment ??" which
was one of the few sources of strength lately ??" is flagging. Why? Because of
concerns about overall economic growth.
This should serve as a reminder that we’re still very much in a paradox of thrift
In normal times, we believe that more saving, private or public, leads to more
investment, because it frees up funds. But for that story to work, you have to
have some channel through which higher savings increase the incentive to
invest. And the way it works in practice, in good times, is that higher savings
allow the Fed to cut interest rates, making capital cheaper, and hence on to
But right now we’re up against the zero lower bound ??" yes, I’ll get the usual
complaints about how long-term rates aren’t zero, but the Fed doesn’t have
direct control over those rates ??" so this normal channel doesn’t work.
And what that means is that if people ??" or the government ??" try to save more,
they only end up depressing the economy. And the weaker economy leads to
lower, not higher investment. And this in turn means that attempts to save more
don’t help our future prospects. On the contrary, they reduce the economy’s
That’s why fiscal austerity is such a terrible idea: no only does it raise
unemployment, it actually makes us poorer in the long run.
Analyze the paradox of thrift as it is described in this post. Explain why it is labeled a
“paradox.” Summarize how the paradox motivates the logic of Keynesian theory
leads to a criticism of the “passive demand” result that follows from simple forms of the
short-run classical model.
Also comment on the “zero bound” for interest rates in this context. What is the
distinction between Krugman’s point that “higher savings allow the Fed to cut interest
rates” and the basic classical perspective on the loanable funds market?
3. News coverage of labor productivity over the past several years has created a debate.
Almost all economists believe that growth in labor productivity is the key to rising
standards of living, at least over some horizons. When slow job growth occurs, however,
it is common to read that if workers become more productive the economy will need
fewer workers and therefore create fewer jobs (see, for example, the attached news article
from November, 2009: “Productivity gains may be bad news for job seekers”). These
worries attribute low job creation statistics, at least in part, to higher labor productivity.
Explore the logic of the link between labor productivity and the job market from the two
main macro perspectives covered in class: the classical model and the Keynesian
Begin by analyzing the effects of higher labor productivity on the macroeconomic
equilibrium in the classical model. Draw the relevant diagrams and briefly explain
classical predictions about the effect of higher productivity on employment, output, the
price level, and the real wage. Then consider how the results would change in the
model. Consider briefly how the Keynesian
results depend on the link
between prices and aggregate demand.
Which side of the productivity debate is right, according to each of the models?
Note: For this question, I encourage you to assume that the marginal productivity of
labor and the negative inverse elasticity of demand (“e”) are constant and therefore the
FM curve is flat. This assumption can be used for both models without changing the
substance of the answer.
From the Associated Press and the Yahoo! website
Productivity gains may be bad news for job seekers
By MARTIN CRUTSINGER and STEPHEN MANNING, AP Business Writers Martin
Crutsinger And Stephen Manning, Ap Business Writers Thu Nov 5 (2009), 5:41 pm ET
WASHINGTON ??" Companies across the economy are finding ways to do more with
fewer workers, dimming hopes that hiring will take off anytime soon.
Employers became leaner and more efficient in the third quarter. Wages, meantime,
remain flat or falling. The result is that productivity ??" output per hour of work ??"
jumped at the fastest pace in six years.
The good news for companies, though, may be bad news for the jobless. As long as
companies can get their workers to produce more, they have little reason to hire ??" at
least until consumer spending picks up. And the squeeze on incomes could depress
consumer spending, putting the economic recovery at risk.
Still, some economists were encouraged by the productivity report. They say that
eventually, employers won't be able to squeeze more from their staffs. They will then
have to ramp up hiring ??" something that could happen next year, even though the jobless
rate is expected to hit double digits.
Productivity rose at an annual rate of 9.5 percent in the July-September quarter, the Labor
Department said Thursday. That was much better than the 6.4 percent gain economists
had expected. Unit labor costs fell at a 5.2 percent rate.
While companies aren't doing much hiring, they're not cutting as many workers, either.
The number of newly laid-off workers filing claims for unemployment benefits last week
fell to the lowest level in 10 months.
On Wall Street, the better-than-expected jobless claims report and an upbeat forecast
from Cisco Systems Inc. buoyed investors. The Dow Jones industrial average added
nearly 204 points to 10,005.96, and broader indexes also gained.
The 9.5 percent productivity rise followed a 6.9 percent surge in the second quarter and
was the fastest since a 9.7 percent increase in the third quarter of 2003.
The gain reflected that the overall economy, as measured by the gross domestic product,
grew for the first time in a year ??" at an annual rate of 3.5 percent. The higher output
came as companies continued to lay off workers. That meant employers produced more
with fewer workers.
The 5.2 percent drop in unit labor costs marked the third straight decline and was larger
than the 4 percent decrease economists were expecting.
Productivity is the key ingredient to rising living standards. It lets companies pay their
workers higher wages. Those increases tend to be financed by increased output, rather
than higher costs for products.
But as they struggled with the recession, companies boosted productivity while
continuing to lay off workers. Many produced more goods; others kept their output down
but slashed costs. Companies kept wages down by freezing pay or imposing unpaid
"Survival meant cutting costs as rapidly as possible and fulfilling orders with the fewest
number of workers," said Joel Naroff, chief economist at Naroff Economic Advisors.
Some companies in hard-hit sectors have managed to boost productivity despite job cuts.
They've had to find ways to stretch their remaining workers to keep up with demand.
Fein Tool North America, a Cincinnati company that supplies auto parts manufacturers,
has cut about 100 workers, or 33 percent of its staff. But Fein president Ralph Hardt said
the company can still fill its orders by using more overtime shifts and temporary workers.
"We are asking more of our people than ever before," he said.
Fein also has made technical changes, including increasing their presses' strokes per
minute so they can stamp more metal.
Hardt said he plans to rehire once the economy picks up again. But he's hesitant to do so
"If I see signs of recovery, I am going to hire back, but I am going to be very prudent," he
Elsewhere, Union Pacific has found ways to reduce the number of crews it needs and is
using more fuel-efficient locomotives. The rail company also rewarded train engineers
who saved fuel on their routes with free gas cards for their personal vehicles, all while
furloughing nearly 10 percent of its 45,000 workers.
Naroff said hiring could remain sluggish for months. But other analysts are more
optimistic. They were encouraged by the productivity report, noting that companies are
starting to reach the limits of how much they can produce with their shrunken work
"We believe businesses will have to start to increase hours worked and payrolls around
the turn of the year since they cannot expect their current work force to sustain such rapid
productivity growth," said Michelle Meyer, an economist at Barclays Capital.
The problem is that consumer demand could falter once the government removes the
stimulus programs it has put in place, such as record-low interest rates and homebuyer
tax credits. Companies could stop hiring if they think demand will slump again.
Temporary surges in labor productivity tend to follow the end of a downturn, said Cliff
Waldman, an economist with trade group Manufacturers Alliance.
"You're having a turn in output from negative to positive with a significantly depleted
labor force," he said. "It gives the illusion that productivity has increased. It's really just
arithmetic more than reality."
In a separate report, the Labor Department said first-time claims for jobless benefits last
week fell by 20,000 to a seasonally adjusted 512,000. That's better than economists'
estimates of 523,000.
Economists closely watch initial claims, which are considered a gauge of the pace of
layoffs and an indication of employers' willingness to hire new workers.
The four-week average of jobless claims, which smooths fluctuations, dropped to
523,750, its ninth straight decline. That's 135,000 below the peak for the recession,
reached in early April.
Despite the improvement, initial claims remain well above the roughly 400,000 that
economists say will signal job creation.
Another 4.1 million people claimed extended unemployment benefits in the week ended
Oct. 17, the latest data available, an increase of about 100,000 from the previous week.
Congress has added 53 weeks of emergency aid on top of the 26 weeks typically
provided by states.
Still, as roughly 7,000 Americans run out of extended benefits every day, Congress has
approved legislation that would add another 14 to 20 weeks. President Barack Obama is
expected to sign the bill.
The National Employment Law Project, an advocacy group, estimates that up to 1.3
million people would exhaust their benefits without the extension.
Economists expect the nation lost a net total of 175,000 jobs last month, adding to the 7.2
million lost since the recession began in December 2007. And many expect the jobless
rate could rise as high as 10.5 percent before the recovery gains enough steam to start
pushing it down next summer.
AP Business Writers Christopher S. Rugaber in Washington and Tali Arbel in New York
contributed to this report.
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