Assignment:
Recessions and price levels; are you a classicalist or a keysian
a) According to figure 7-9 and most classical economist (those that believe in free markets and most likely, those associated with the Republican Party) believe that when there is a recession, the wage rate and the price level will adjust to move us back to long run equilibrium. Hence, the beauty of the free market system. The Keysians ( and those economist who advise the Democratic Party) believe that prices and wages do not adjust in a recession and therefore prices and wages are ‘sticky downward'. If this is the case, then we will be stuck in a recession for a long time, so the government needs to come in with a fiscal stimulus to stimulate the economy. Obama did this, as did George Bush.
i) Do you personally believe that wages and prices adjusted downward in this past recession. Did you see housing prices come down, medical prices, milk and bread prices, gas prices, or insurance costs (for example). This is important. It determines whether you align yourself with conservative economist (republican) or keysian economist (democrat). What other prices did you see either not come down in the recession or did come down. Back this up with statistics of one or two commodities (or more - or the general price level or general wage level) from the internet on prices of specific goods.
ii) Do you think wages came down during a recession. This is important. It determines whether you align yourself with conservative economist (republican) or keysian economist (democrat). Did your wage come down (ie, if you are a salesman working on commission - did you lose commissions). Did your company stop contributing to your 401 k (ask your parents this if you do not have a 401 k). Did you know of anyone who lost their job and had to accept a job at a lower pay. Did your company lay off people only to hire workers back at a cheaper wage. If the answer to these questions are yes, then your are a classicalist. If you can say no, then you are a Keysian and both Bush and Obama were right to have a fiscal stimulas.
iii) I personally see both sides. Sometimes I do not see evidence of prices and wages adjusting downwards and then sometimes I do see it. But here is what I am thinking. Assume that wages during the great recession comes down by 10% and then prices come down by 10%.
Everything is ok, correct? We move back into equilibrium as evidenced by figure 7-9 and as the classicalist predict. But what if wages come down by 10% and prices come down by 10%. But your contracts do not adjust downward (ie, your mortgage does not come down simply because your wage went down). So, what will happen to aggregate demand. And won't this lead to deflation and a further worsening of the great recession.
Links that can be used : https://www.youtube.com/watch?v=hPkh8kOldU4&list=TLjSq8ICbBy1g
https://www.youtube.com/watch?v=g_647R_vUVc
Attachment:- Equilibrium Real Wages.rar