Slow Money Wages

In the current section, we shall assume slow money wages. The short-run equilibrium and the long-run equilibrium have been derived above, cf. sections 2 and 3. As a fundamental result, under both flexible and fixed money wages, the long-run equilibrium is unstable, as has been demonstrated in sections 4 and 5. As a consequence, under slow money wages, the long-run equilibrium will be unstable, too. This outcome is in sharp contrast to the conclusions drawn in the basic model, where the long-run equilibrium turned out to be stable. That is to say, the public sector creates long-run instability.