In: Economics
4) list the main thrusts of the new Keynesians thought.
5) explain why formal and implicit contracts lead to and increase in unemployment according to new Keynesian school and how government should intervene actively through fiscal and monetary policies to counter this problem.
4) Keynesian economics is a theory that says government should increase demand to increase the growth.Keynesian believes consumer demand is the primary driving in an economy.As a result the theory supports expansionary fiscal policy.Its main tools on government spending are on infrastructure, unemployment,
The main thrust of Keynesian theory is that
a) velocity of circulation is constant.
b)full employment of resources is the natural state of free economy.
Keynes believed that velocity of circulation was volatile and there often existed underemployment of resources due to recessionary conditions in economy.
5) The difference in unemployment is attributable to differences in how labor markets function under explicit and implicit contract enforcement. When third party contract enforcement is not feasible, firms generate implicit performance incentives by paying strictly positive rents to their workers, and employing a policy of contingent contract renewal. In such relational contracts, high-performing workers are rewarded by being re-employed and earning positive rents in future periods; shirking workers are punished through dismissal
Contractual incompleteness leads to a stable coexistence of different job types. After an initial phase in which we observe a trend towards job rationing in the IC treatment, a plateau is reached such that unemployment stabilizes at a high level, and a relatively constant fraction of firms continues to operate without rationing job offers.
To overcome unemplyment government can use following methods
a) Monetary policy: Cutting interest rates to cut the aggregate demand.
b) Fiscal policy:Cutting taxes to boost aggregate demand.