1. PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 12 Modern Keynesian Theory with Rational Expectations

2. Copyright © 2004 South-Western. All rights reserved.12–2 Fundamental Issues 1.What are the essential elements of the modern Keynesian theory of wage stickiness? 2.In what respect is the modern Keynesian theory observationally equivalent to the new classical model? 3.How does the degree of wage indexation affect the elasticity of the aggregate supply schedule, and what role does this elasticity play in determining the optimal degree of indexation?

3. Copyright © 2004 South-Western. All rights reserved.12–3 Fundamental Issues (cont’d) 4.What factors determine the duration of wage contracts, and what are the macroeconomic implications of overlapping contract intervals? 5.Are the wage contracting models proposed by the modern Keynesian theorists relevant in today’s world?

4. Copyright © 2004 South-Western. All rights reserved.12–4 Figure 12–1 Full-Information Labor Market Equilibrium

5. Copyright © 2004 South-Western. All rights reserved.12–5 Figure 12–2 Determining the Contract Wage

6. Copyright © 2004 South-Western. All rights reserved.12–6 Figure 12–3 Deriving the Aggregate Supply Schedule with Rational Wage Contracts

7. Copyright © 2004 South-Western. All rights reserved.12–7 Source: Figure 12–4 Annual Changes in Employment Cost Indexes for Wages and Salaries and for Benefits

8. Copyright © 2004 South-Western. All rights reserved.12–8 Figure 12–5 The Effects of Unanticipated Policy Actions

9. Copyright © 2004 South-Western. All rights reserved.12–9 Figure 12–6 The Effects of Policy Actions That Workers and Firms Anticipate

10. Copyright © 2004 South-Western. All rights reserved.12–10 Figure 12–7 The Aggregate Supply Schedule with Fully Indexed Nominal Wages

11. Copyright © 2004 South-Western. All rights reserved.12–11 Sources: John Duca and David VanHoose, “The Rise of Goods- Market Competition and the Decline in Wage Indexation,” Journal of Macroeconomics 20 (Summer 1998); authors’ estimates. Figure 12–8 The Share of U.S. Labor Contracts Containing Indexation Clauses, 1956–Present

12. Copyright © 2004 South-Western. All rights reserved.12–12 Figure 12–9 The Effects of a Decline in Aggregate Supply with Nonindexed and Completely Indexed Contract Wages

13. Copyright © 2004 South-Western. All rights reserved.12–13 Figure 12–10 Overlapping Wage Contracts

14. Copyright © 2004 South-Western. All rights reserved.12–14 Sources: John Duca and David VanHoose, “The Rise of Goods-Market Competition and the Decline in Wage Indexation,” Journal of Macroeconomics 20 (Summer 1998): 579–598; authors’ estimates. Figure 12–11 The Share of U.S. Labor Contracts with Indexation Clauses and a Measure of Overall Competition among U.S. Firms

15. Copyright © 2004 South-Western. All rights reserved.12–15 Sources: John Duca and David VanHoose, “The Rise of Goods-Market Competition and the Fall of Wage Inflexibility: Endogenous Wage Contracting in a Multisector Economy,” Journal of Macroeconomics 23 (1, Winter 2001); authors’ estimates. Figure 12–12 Unions’ Share of U.S. Private-Sector Employment and a Measure of Overall Competition among U.S. Firms

16. Copyright © 2004 South-Western. All rights reserved.12–16 Sources: Board of Governors of the Federal Reserve System; Bureau of Labor Statistics; authors’ estimates. Figure 12–13 The Share of U.S. Firms Using Profit-Sharing Arrangements