Macro economy theory and policy adaptation in reality situation

New Keynesian economics could use to explain in this current situation.N.Gregory Mankiw and David Romer who have been improved the previous Keynesian economics theory, when the new classical economist criticize the theory was technically inadequate. The reason is the theory does not include microeconomic foundation which the new classical economics theory does.

The pump price going down, the prices of essential items have not come down. The domestic trade and consumer affairs minister expect all the traders cut down the price as a welcome of pump price going down gradually. Therefore all hypermarket, mini-markets and wet markets should ensure the best prices for consumers.

Hypermarket will easily reduce the goods because their purchase the goods in huge quantities. Whereas the mini market and wet market unable meet the consumer demand regarding price reduction. The wet market selling perishable goods, these kinds of goods can not last long. Therefore the wet market traders charging a bit higher on the goods during the peak hours but incurring loses sell after the times meet reaches 11 a.m. Fresh vegetables and meats cannot keep too long, or in consequence losing the potential consumers.

Mini markets unable reduce their prices because there might be older stores which purchased in higher rate. The perishable goods purchased from the wet market after sold to local residents, the goods have been value added not in the context of quality but the prices gone up. The traders and shoppers are charging shoes leather cost and transportation fee which the journey to wet market. Until now the transportation union does announce they will reduce the transportation charging fee. In simple conclusion transportation charging fee does not reduce, prices of essential goods hardly to reduce. The chain effect will keep going deteriorate the situation.

New Keynesian theory could be apply in this situation, the sticky price (menu cost) models.

Sticky price (menu cost) that mean firm would hold the product prices unchanged even though the demand keep falling. This is because the cost of changing the prices out weight the benefit of prices cut. Example if a restaurant wants to change the prices, they should be really to print new menus. If they do so, they are directly or indirectly incurring several types of costs.

One of the costs is managerial costs which mean costs of gathering the information , communication and negotiation .Cost of gathering the information , firms require to find a optimal price change levels. Next the cost of communication and negotiation, firms unduly persuade the customers who resist the change.

Perfect competition market does not exist but in theory it does .It reality world, firms may engage in monopoly or oligopoly markets. Therefore the new classical theory not completely fitted in reality world because the market render by real rigidities. That has answered the question. Even though money wage are changing, aggregate demand, output and employment not corresponding with the changes.

To be Continue………….