Short Problem Set 6 (PS6)
Principles of Macroeconomics (Eco 200-800) SUNY-Oswego
Solutions will be posted or distributed by Wed., March 29, 2000 Ranjit Dighe

I. M-O-N-E-Y

Case & Fair, 5th edition, Chapter 11: #6
 

II. HARD TIMES

The Great Depression began in late 1929 and lasted until early 1941. In the crucial two-year period from mid-1931 to mid-1933 real and nominal wages both fell, and yet, in seeming contradiction to the law of demand, employment failed to rise (and, in fact, fell).

A. Unless a major productivity drop occurred during that time (it didn't), that pattern of falling real wages and falling employment is incompatible with the classical labor market (with or without sticky wages). Explain why.

B. That pattern of falling real wages and falling employment is entirely consistent with the deficient-demand theory of unemployment. Explain why.