Dynamic New Keynesian Model for Unemployment and Inflation Rate.

Abstract

This paper deals with a scientific analysis of the equilibrium level of hiring, employment and unemployment. The basic model being used is a standard new Keynesian model, which states that utility function depends on consumptions and working hours. Utility maximization refers to a standard labour supply equation, with the marginal cost’s dynamics on new Keynesian model simply reflects movements in real wages and productivity. Furthermore, trade-off between output and inflation stabilization can be considered using the new Keynesian Phillips curve. Dynamic general equilibrium model is a model that can be used to study interactions between market imperfections and nominal rigidities, which is capable of overcoming the main shortcoming of the standard new Keynesian model. In the general equilibrium model there are three groups of the economy agents, namely households, firms and monetary authority. The results of this research science that bargaining processes between firms and workers will yield optimal wage. Increase in labour will cause wages to fall, but the unemployment rate can be reduced. An increase in the firm’s monopoly power will shift the labour demand curve downward, which will reduce the number of workers that firm is willing to hire for any given bargained wage.