Rational Expectations and Keynesian

1
Rational Expectations and Keynesian

• First reaction No relevance

2
Rational Expectations and Keynesian

• First reaction No relevance
• Second reaction There has been some negligence

3
Rational Expectations and Keynesian

• Wage and price inflexibility due to long term
  contracts makes monetary policy effective because
  it erodes the real wage rate and therefore
  increases employment and output.

4
Rational Expectations and Keynesian

• Wage and price inflexibility due to long term
  contracts makes monetary policy effective because
  it erodes the real wage rate and therefore
  increases employment and output. These contracts
  could be explicit and written contracts or
  implicit understanding about remuneration,
  rewards, and conditions of work.

5
Rational Expectations and Keynesian

• Why do we as employers or employees agree to a
  contract?
• 1-- Without a contract one needs to rely on the
  auction market. That is, employers constantly
  would be looking for replacement of their
  workforce and employees must be constantly
  looking for a better paying job. It costs too
  much to both sides

6
Rational Expectations and Keynesian

• Why do we as employers or employees agree to a
  contract?
• 2-- risk aversion
• contracts would safeguard workers from a sudden
  fall in the wage rate while they safeguard
  employers from a sudden rise in the wage rates.