Sticky-Prices

Paper Summary:

A discussion of this economic theory. The paper examines when and how it was implemented, as well as criticism of the theory. Also looks at its history and how it was adapted by other economists.

From the Paper:

"One of the key ideas of John Maynard Keynes was that the government must be able to 'spend' even if her people could not or was not able to, through borrowed money. This would result in an increase in the money supply. Many economists believe that it was due, in a great part to this theory of deficit spending on the part of the government that resulted in the USA's escape from the Great Depression after the World War 2. If more money would result in more economic activity, then the Central Bank could merely print more currency and everybody would be a millionaire. However, printing more currency would merely result in inflation or, in other words, sky-high prices for all products, which everyone would be able to afford. Everybody being a millionaire, there would be no difference, and people would do again their original jobs. To fight against this situation, the Central Bank actually removes money from the existing market, and people can no longer afford all that they desire. This would result in a high level of unemployment wherein a person who was doing a job for $10 an hour would agree to work for $7 an hour, since something is better than nothing. This proves that all economic activity will eventually re adjust to the existing level of money at the time."

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