Question

1. Do you agree with the proposition that downward stickiness in money wages is the only reason for the existence of involuntary unemployment in Keynes’s model? If not, what are the other obstacles to the self-righting property of the market economy, and explain their implications for the aggregate demand curve as well as the working of the Keynes’s model under the assumption that money wages are flexible. Elaborate your answer using IS-LM, AD-AS and labor market curves.
2. Demonstrate that it was Tobin (1958) who developed a more general rationale for Keynes’ liquidity preference theory establishing the negative dependence of the demand for money on the interest rate. Derive and explain the negatively sloped money demand curve using Tobin’s portfolio balance model.
3. Briefly explain the Phillips curve relation between inflation and unemployment and its policy implications for macroeconomic management. What challenge did the Phillips curve relation pose to the Keynesians working in the economic environment of the post-War period and how did Keynesians reconcile to it? Briefly explain implication and predictive inconsistency of the Keynesian-neoclassical synthesis model.

Answer 1