A Keynesian Solution to Classical Unemployment
In a classical macroeconomic model, the real wage equals labor's marginal product and the real interest rate can fall no lower than the rate of investment. These rigidities may prevent labor market clearing. Economies with rapid labor supply growth, capital immobility and a low capital labor ratio will be prone to such `classical unemployment'. Downward ¡ãexibility in real wages restores full employment, lowers real interest rates and stimulates investment provided that ¡¥rms also perceive that they are rationed in output sales. Such quantity constraints have been identi¡¥ed by Clower (1965) as a critical feature in Keynes (1936).
|Date of creation:||Nov 1999|
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- Douglas D. Purvis, 1976.
"The Neoclassical Theory of the Firm: A Note on the Production and Investment Decisions,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 9(2), pages 331-341, May.
- Douglas D. Purvis, 1975. "The Neoclassical Theory of the Firm: A Note on the Production and Investment Decisions," Working Papers 178, Queen's University, Department of Economics.
- Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-652, Part II, .
- Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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