,ECS4861 Assignment 3 (COMPLETE ANSWERS)
2025 - DUE 13 August 2025
MULTIPLE CHOICE,ASSURED EXCELLENCE
Title: Wage and Price Rigidities and Involuntary Unemployment:
A Keynesian Perspective
Introduction
Classical economics assumes that perfectly flexible wages and
prices ensure that markets clear, and unemployment is only
temporary. When labour markets experience excess supply,
falling wages are expected to restore equilibrium by increasing
demand for labour. John Maynard Keynes challenged this belief,
arguing that involuntary unemployment could persist even in
the absence of complete wage flexibility. Wage and price
rigidities — the slow or incomplete adjustment of wages and
prices to changes in economic conditions — have therefore
become central to many Keynesian explanations of
unemployment. The question is whether these rigidities are
necessary to explain involuntary unemployment, or whether
other factors, such as insufficient aggregate demand, can play
the same role. This essay examines the issue from three
perspectives: Keynes’s original General Theory, the Orthodox
Keynesian school, and New Keynesian economics.
Keynes’s General Theory
, In The General Theory of Employment, Interest and Money
(1936), Keynes rejected the classical view that falling wages and
prices automatically restore full employment. He argued that
the level of employment in the economy is determined by
aggregate demand — the total spending by households, firms,
and the government. Reducing wages does not necessarily
increase employment because wage cuts reduce workers’
incomes, which in turn lowers consumption. Lower
consumption weakens demand for goods and services,
prompting firms to reduce production and lay off workers rather
than hire more.
Keynes acknowledged that wage and price rigidities exist, often
due to contracts, social norms, and bargaining arrangements.
However, he did not consider them the primary cause of
unemployment. Even with fully flexible wages and prices,
insufficient aggregate demand could maintain high levels of
unemployment. For Keynes, the solution lay in active
government intervention through fiscal policy to boost
spending and stimulate the economy.
In short, wage and price rigidities in Keynes’s framework are not
strictly necessary to explain involuntary unemployment. They
exacerbate the problem by slowing the adjustment process, but
the root cause lies in demand deficiencies.
2025 - DUE 13 August 2025
MULTIPLE CHOICE,ASSURED EXCELLENCE
Title: Wage and Price Rigidities and Involuntary Unemployment:
A Keynesian Perspective
Introduction
Classical economics assumes that perfectly flexible wages and
prices ensure that markets clear, and unemployment is only
temporary. When labour markets experience excess supply,
falling wages are expected to restore equilibrium by increasing
demand for labour. John Maynard Keynes challenged this belief,
arguing that involuntary unemployment could persist even in
the absence of complete wage flexibility. Wage and price
rigidities — the slow or incomplete adjustment of wages and
prices to changes in economic conditions — have therefore
become central to many Keynesian explanations of
unemployment. The question is whether these rigidities are
necessary to explain involuntary unemployment, or whether
other factors, such as insufficient aggregate demand, can play
the same role. This essay examines the issue from three
perspectives: Keynes’s original General Theory, the Orthodox
Keynesian school, and New Keynesian economics.
Keynes’s General Theory
, In The General Theory of Employment, Interest and Money
(1936), Keynes rejected the classical view that falling wages and
prices automatically restore full employment. He argued that
the level of employment in the economy is determined by
aggregate demand — the total spending by households, firms,
and the government. Reducing wages does not necessarily
increase employment because wage cuts reduce workers’
incomes, which in turn lowers consumption. Lower
consumption weakens demand for goods and services,
prompting firms to reduce production and lay off workers rather
than hire more.
Keynes acknowledged that wage and price rigidities exist, often
due to contracts, social norms, and bargaining arrangements.
However, he did not consider them the primary cause of
unemployment. Even with fully flexible wages and prices,
insufficient aggregate demand could maintain high levels of
unemployment. For Keynes, the solution lay in active
government intervention through fiscal policy to boost
spending and stimulate the economy.
In short, wage and price rigidities in Keynes’s framework are not
strictly necessary to explain involuntary unemployment. They
exacerbate the problem by slowing the adjustment process, but
the root cause lies in demand deficiencies.
