ABSTRACT
Chapter 6 presented the MF model. As we noted then and again in Chapter 7, one of the weaknesses of the model is that it assumes wages and prices are fixed; it is therefore a model which has a greater bearing and relevance to the shorter run or for the analysis of temporary short-term disturbances. For a more sustained policy change, it is clearly inappropriate to disregard wages and prices. In this chapter, we extend the MF model in one respect only retaining all the other features of the model we now accommodate wage and price adjustment. Whereas in the MF model we identified three markets – a goods market, a money market and a foreign exchange market – we now extend the model to accommodate a labour market. Again we use comparative statics analysis.
