Lecture 9. sticky wages and the great depression

Question 1

what is unemployment?

Answer 1

excess supply of labour that occurs when the labour market is in disequillibrium. unemployed people that would like a job at market wage but cant get one

Question 2

what are causes of unemployment

Answer 2

– Trade Unions/ qualified workers bargaining power
– Transaction costs ( time to find good matching job)
– Imperfect information (about the afford of employee) and efficient wage

Question 3

what is sticky wages?

Answer 3

the keynsian explanation for unemployment. the labour demand and supply depends on real wage but wages are sticky due to annual contracts being written. the labour market can be in disequillibrium. increase in price reduces unemployment and increases output. decrease in price increases the real wage. deflation surges unemployment

Question 4

what was the financial accelarator during the great depression?

Answer 4

the reduction of the money supply in this period seems quantitatively insufficient to explain the subsequent falls in output

Question 5

what occured before the great depression?

Answer 5

there was an increase in the consumption of durable goods and fast growth of the stock market index. expectations of further growth of equities and even acceleration
loans to producers and consumers from bank.
increase in the policy rate in 1928 from 4 to 6%
debt service to national income increased from 9 to 20%

Question 6

what are the two empiracle findings of the great depression?

Answer 6

1) unexpected change in price level was more significant than unexpected changes in the M1
2) changes in the credit market are significant

Question 7

what occured from 1929 to 1930?

Answer 7

banking crisis is persistent due to attitudes towards the risk of lending and the impossibility to refinance destroys corporations and they do not return to the buissness after
uncertainty about future businesses and income
expected deflation
decline in velocity