e with an increase in consumption demand due to the change in income. 3. Possible reasons why the money wage does not adjust proportionately with the price level in the short-run Keynesian model.a. Workers were interested in both their absolute and relative wage rates. Absolute wage rate means the wage rate that actually effects me and relative wage rate meaning the wage rate of others in relation to mine.b. Unionized sectors of the economy that utilized labor contracts, sometime lasting 2 to 3 years.c. Even in the absence of formal labor contracts, informal agreements between workers and firms may have existed.4. Increase in the money stock with price level & money wage are assumed to be variable.IS-LM ModelAD-AS Modela. An increase in the money stock is shown to shift the LM schedule to the right & the aggregate demand schedule to the right. Price level increased from Po to P1. Output increased from Yo to Y1. In the IS-LM model, output & employment rose and interest rates fell from R0 to R1. When price level is allowed to vary, the increase in output will be less than when the price level in fixed output rises to Y1 instead of Y’1. The reason is that the increase in the price level reduces the real money stock & the reduction partially effects of the increase in the nominal quantity of money. The interest rate falls only to R1, not R’1. This policy has smaller effect on investment & output.5. Friedman’s theory of money demand differed from that of Keynesians in that Keynesian theory emphasized money as a determinant of the level of economic activity. But, “velocity” was not constant and it was determined within the system. Friedman viewed demand as stable. Friedman doesn’t segment money demand into transactions demand, speculation demand, and precautionary demand. Friedman includes separate returns for different asset classes. Md = K (Rb, Rc, Rd) P x YP x Y = nominal incomeMd = money de...
