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In: Economics

Classical economists belief that prices and quantities adjust to the changes in the forces of supply...

Classical economists belief that prices and quantities adjust to the changes in the forces of supply and demand and that the economy produces its potential output in the long run. On the contrary, Keynesian economists believe because of price and wage rigidities the economy’s equilibrium output in the long run may be less than its potential output. What is wage-price rigidity? Do you agree with Keynes assessment that wage-price rigidity requires government’s involvement in the markets? Why? Why not?

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Wage price rigidity, as suggested by Keynes, states that wages and prices in the economy tend to be sticky and not flexible. This is because wages do not tend to go down because of the presence of unions who will bargain and go on strikes to make sure wages do not fall below a certain level, in any condition and also because of pre-signed employment contracts.

In certain cases, government intervention is definitely needed to correct for market disequilibrium, because when the market forces fail to correct the disequilibrium and the economy is falling beyond control, government intervention is needed to implement corrective measures and policies to protect the falling side of the economy and leave once the work is done.

Yes, I agree with Keynes idea of government intervention because societies do sometimes fail to correct themselves because of certain glitches and lags from either side, and a minor issue with one side of the economy affects the entire economy, since it is a vicious circle. Thus, during these times, government involvement is needed to help the failing economy, put it back on track and leave once the work is done. Continuous involvement is not supported, but only in times of need.

Rahul Sunny answered 1 year ago
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