What are the implications of wages being "sticky downward"? (check all that apply)

What are the implications of wages being "sticky downward"? (check all that apply)

          Employers will lay off workers rather than cut wage rates
          Disequilibrium can persist in labor markets
          The aggregate supply curve will not fall enough to bring the economy back to potential GDP
          A recessionary equilibrium can persist

What did Keynes mean when he said: "In the long-run we are all dead"?

          All people eventually die
          There is no hope for economic conditions to improve
          The long-run is not the appropriate time frame when we are in a recession
          Death rates rise during a recession

Solutions

Expert Solution

1. Downward rigidity or stickiness in wages implies that wages are flexible in moving in upward direction but inflexible in moving in downward direction. This is because employees do not resist wage hikes but resist wage cuts by forming unions,etc.

Implications of wages being "sticky downward":

(i) Employers will lay off workers rather than cut wage rates - since wage cuts will be resisted by workers.

(ii) Disequilibrium can persist in labor markets - as a consequence of inflexible wages

(iii) The aggregate supply curve will not fall enough to bring the economy back to potential GDP - since wages will not decrease proportionately and the supply curve will not fall by sufficient level.

(iv) A recessionary equilibrium can persist

2. c. The long-run is not the appropriate time frame when we are in a recession.

Keynes' statement "In the long-run we are all dead" implies that economic measures should be pursued by keeping short run in mind since long run is too long a period to take into account. For example, while proposing fiscal stimulus during recession, policymakers should not aim for long run corrections but instead should focus on short run remedies as it is the approriate time frame.

Rahul Sunny answered 2 years ago

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