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Insights of the classical and Keynesian views of wages

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Throughout the 1990s, Western Europe experienced high rates of unemployment, while in the United States, the rate of unemployment remained far below the natural rate. Use the insights of the classical and Keynesian views of wages and unemployment to explain the differences in unemployment rates between the United States and Western European countries.

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Keynes believed that aggregate demand determined real GDP. From the events of the 1930s, it was apparent to him that output and employment do not necessary move toward full employment levels. A sudden decline in demand can ripple through the economy, a companies lay off workers, which further reduces demand. His model uses a horizontal AS curve for this reason. The economy can thus become stuck at levels of low output, where only part of its resources are being utilized. This suggests that in order to recover from depressions or recessions, a stimulus to aggregate demand is required. Examples of measures to bring this about are: increases in government expenditure, reductions in taxation, and reductions in interest rates. ...

Solution Summary

Using insights of classical and Keynesian views of wages to explain the differences in unemployment rates between the United States and Western European countries.

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