5. why do Keynesian economists see price stickiness in the monopolistic competit

Question

5. why do Keynesian economists see price stickiness in the monopolistic competitive business?

6. if there is an increase in the money supply what affect would there be on the following (increase, decrease, or remain the same for questions a to h):

a. The LM curve b. IS curve c. Aggregate Demand d. Output in the short run (Keynesian Model) e. Real interest rates (short run)

f. Employment g. Prices (long run) h. Output (long run)

7. how does the keynesian model differ from the classical model in the short run?

8. how does the Keynesian model differ from the Classical model in the long run?

Explanation / Answer

The monopolistic competitive market is characterized by relatively large number of firms producing slightly differentiated product. The product differentiation gives the firm certain market power and the firms set price equal to average total cost in the long run. Thus no firm in the market earn positive economic profit. Thus, unlike perfect competition the prices in monopolistically competitive market does not changes with change in demand. In short run the monopolistically competitive firm does not alter prices as long as the demand and costs does not changes significantly.

Thus Keynesian economists assumes monopolistically competitive market where prices are rigid but there is no profit in the long run and thus loss to the society is minimum.

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