macroeconomics

PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved.

Chapter 12Modern

Keynesian Theory with

Rational Expectations

Copyright © 2004 South-Western. All rights reserved. 12–2

Fundamental Issues

1. What are the essential elements of the modern Keynesian theory of wage stickiness?

2. In what respect is the modern Keynesian theory observationally equivalent to the new classical model?

3. How does the degree of wage indexation affect the elasticity of the aggregate supply schedule, and what role does this elasticity play in determining the optimal degree of indexation?


Fundamental Issues (cont’d)

4. What factors determine the duration of wage contracts, and what are the macroeconomic implications of overlapping contract intervals?

5. Are the wage contracting models proposed by the modern Keynesian theorists relevant in today’s world?

Copyright © 2004 South-Western. All rights reserved. 12–4 Figure 12–1

Full-Information Labor Market Equilibrium


Determining the Contract Wage


Deriving the Aggregate Supply

Schedule with Rational Wage

Contracts

Copyright © 2004 South-Western. All rights reserved. 12–7Source: Figure 12–4

Annual Changes in Employment Cost Indexes for Wages and Salaries and for Benefits


The Effects of Unanticipated Policy

Actions


The Effects of Policy Actions

That Workers and Firms Anticipate


The Aggregate Supply Schedule

with Fully Indexed Nominal Wages


Sources: John Duca and David VanHoose, “The Rise of Goods-Market Competition and the Decline in Wage Indexation,” Journal of Macroeconomics 20 (Summer 1998); authors’ estimates. Figure 12–8

The Share of U.S. Labor Contracts Containing Indexation Clauses, 1956–Present


The Effects of a Decline in Aggregate Supply with

Nonindexed and Completely Indexed

Contract Wages


Overlapping Wage Contracts


Sources: John Duca and David VanHoose, “The Rise of Goods-Market Competition and the Decline in Wage Indexation,” Journal of Macroeconomics 20 (Summer 1998): 579–598; authors’ estimates. Figure 12–11

The Share of U.S. Labor Contracts with Indexation Clauses and a Measure of Overall Competition among U.S. Firms


Sources: John Duca and David VanHoose, “The Rise of Goods-Market Competition and the Fall of Wage Inflexibility: Endogenous Wage Contracting in a Multisector Economy,” Journal of Macroeconomics 23 (1, Winter 2001); authors’ estimates. Figure 12–12

Unions’ Share of U.S. Private-Sector Employment and a Measure of Overall Competition among U.S. Firms


Sources: Board of Governors of the Federal Reserve System; Bureau of Labor Statistics; authors’ estimates. Figure 12–13

The Share of U.S. Firms Using Profit-Sharing Arrangements

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