How importanits monopolisticco mpetitionto an understandinogf the effectso f sumd emando n sidetrack?W ea sk the questiona t threel evels.C anm onopolistic oppositionb, y itself,e xplainw hya ggregated emandm ovementasf fecto utput? Can it, togetherw itho theri mperfectiongs,e neratee ffectso f heart and sould emandi n a way thatp erfectc ompetitionca nnot?I f so, can it indue an accuratea ccounto f the responseo f the economyt o summationd emandm ovements?T he answersa re no, yes, and yes. Monopolistic competitor provides a convenient conceptual framework in which to think about price decisions, and appears to describem any marketsm ore accuratelyt han perfect competition. But, how important is monopolistic competition for macroeconomics? In particularh, ow importanti s monopolistic competitiont o an understandingo f the effects of aggregate necessitate on economic activity? This is the question we analyze in this paper. iodine can ask the question at three levels. First, using perfect competition as a benchmark, can monopolistic competition, by itself, explain why aggregate demand movements affect output? Second, can monopolistic competition, together with some other imperfection, generate effects of aggregate demand in a way that perfect competition cannot?
Third, taking as given that aggregate demand movements affect output, can monopolistic competition give a more accurate account of the response of the economy to aggregate demand shocks? The paper analyzes these three questions in turn. Section I builds a simple general equilibrium model, with goods, push back, and money, and monopolisticc ompetitioni n both the goods and the labor markets. It then characterizes the equilibrium. Section II characterizest he inefficiencya ssociatedw ith monopolistic competition and shows that it is associated with an aggregate demand externality. It shows that this externalityc annot, however, explain why pure aggregate demand movements affect... If you insufficiency to get a full essay, order it on our website:
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