, &
'Stuck Price' Model
x VIP assumptions >
-
prices are fixed ③ Current Relevance
version
aggregate expenditures model aggregate expenditures
X the extreme - the model still
,
of sticky-price model.
relevant
today
in modern economy
X Keynes made assumption bes prices not declined
=> bes
many prices
sufficiently during Great Depression to boast inflexible downward over short periods
spending & maintain output 3 employment time
↳ theories before GD predicted prices fall to equate
=> of it helps us understand how
quantity supplied3 demanded .
modern
↳ prices didn't actually
fal,
the economy sank below
l economic economy likely adjusta
potential output .
-
appl unemployment ↑
③is
a
Capital
unplanned
panned
due
Inventory
Keynes thought unemployment
firms reacting predictable
increase in inventory levels
labour B
⑭tions
way
to
cation
X firms stock up inventory ,
think rapid future sales
op
decrease inventory levels if think
intentionally
demand decrease in future
>
-
sometimes the opposite happens.
X During Great Depression :
households businesses reduced spending
3 aggregat
·
=> caused unsold inventory surge etes
=> this reduced rates production
greatly model
=> some factories shutdown
=> increased
unemployment
'Stuck Price' Model
x VIP assumptions >
-
prices are fixed ③ Current Relevance
version
aggregate expenditures model aggregate expenditures
X the extreme - the model still
,
of sticky-price model.
relevant
today
in modern economy
X Keynes made assumption bes prices not declined
=> bes
many prices
sufficiently during Great Depression to boast inflexible downward over short periods
spending & maintain output 3 employment time
↳ theories before GD predicted prices fall to equate
=> of it helps us understand how
quantity supplied3 demanded .
modern
↳ prices didn't actually
fal,
the economy sank below
l economic economy likely adjusta
potential output .
-
appl unemployment ↑
③is
a
Capital
unplanned
panned
due
Inventory
Keynes thought unemployment
firms reacting predictable
increase in inventory levels
labour B
⑭tions
way
to
cation
X firms stock up inventory ,
think rapid future sales
op
decrease inventory levels if think
intentionally
demand decrease in future
>
-
sometimes the opposite happens.
X During Great Depression :
households businesses reduced spending
3 aggregat
·
=> caused unsold inventory surge etes
=> this reduced rates production
greatly model
=> some factories shutdown
=> increased
unemployment
