Macroeconomics

Wage inflation

In this article, we will continue to develop the Keynesian model removing the assumption of fixed nominal wages. We define wage inflation πw as the percentage average increase in wages. Wages and wage inflation are still exogenous, i.e. they are not determined within the model. One justification for this assumption is that wages often are determined by agreements which often last for several years.

The labor market stands as one of the most critical components of any economic system, serving as the arena where employers seek workers and workers seek employment. Unlike markets for goods and services, the labor market involves human capital—the skills, knowledge, and abilities that individuals bring to their jobs. This unique characteristic makes the labor market particularly complex, as it is influenced not only by economic forces but also by social, political, and psychological factors.

The Keynesian model

In this chapter we will look at the Keynesian cross model. This model is a simple version of what we call the ”complete Keynesian model” or simply the Keynesian model. The Keynesian model has as its origin the writings of John Maynard Keynes in the 1930s, particularly the book ”The general theory of Employment, Interest, and Money”.

The IS-LM model (Investment-Savings and Liquidity Preference-Money Supply) is one of the most fundamental tools in macroeconomic analysis. Developed by John Hicks in 1937 as an interpretation of John Maynard Keynes' "The General Theory of Employment, Interest, and Money," this model provides a graphical representation of the relationship between interest rates and real output in the goods and money markets.

The structure of the American economy is evolving. Technology is one of the driving forces, both domestically and in integrating the U.S. economy with the global economy. The domestic economy does not operate in a vacuum.In a relatively open global economy, structural change in emerging economies causes structural change in advanced countries.