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A Keynesian model of aggregate demand in the long‐run
Author(s) -
McDonald Ian M.
Publication year - 2021
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12328
Subject(s) - economics , aggregate demand , monopoly , unemployment , deflation , wage , investment (military) , keynesian economics , monetary economics , stagflation , labour economics , macroeconomics , microeconomics , monetary policy , politics , political science , law
This paper develops the Keynesian theory of aggregate demand in the long‐run in which persistently low levels of aggregate demand can generate persistently low levels of activity with the associated persistently high rates of unemployment. Wages are determined by firm‐worker bargaining/sharing. Investment is influenced by monopoly power, aggregate demand and the interest rate. Decreasing rates of deflation of money wages and prices even at high rates of unemployment are prevented by workers being assumed to be loss averse with respect to reductions in their wages below a reference real wage.