What Are The Implications Of Incorporating The Kaleckian Concept Of 'degree Of Monopoly' Into A Post-Keynesian IS-LM Model, Specifically In Terms Of How It Affects The Slope Of The IS Curve And The Responsiveness Of Aggregate Demand To Changes In Government Spending In A Small Open Economy With A High Degree Of Import Penetration?
Incorporating the Kaleckian concept of 'degree of monopoly' into a post-Keynesian IS-LM model in a small, open economy with high import penetration yields the following implications:
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Flatter IS Curve: The IS curve becomes flatter because investment is less responsive to changes in interest rates. Firms with higher monopoly power rely more on retained earnings and are less sensitive to interest rate changes, reducing the impact of interest rates on investment decisions.
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Reduced Responsiveness of Aggregate Demand: Aggregate demand becomes less responsive to government spending due to two factors:
- Interest Rate Insensitivity: The flatter IS curve means that changes in government spending lead to smaller changes in output, as the interest rate effect is dampened.
- High Import Penetration: A significant portion of increased demand from government spending leaks out of the domestic economy through imports, weakening the fiscal multiplier effect.
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Impact on Consumption: Higher monopoly power may lead to reduced real wages, further diminishing consumption and thus the responsiveness of aggregate demand.
Overall, the model reflects an economy where policy interventions, particularly through government spending, have a muted effect due to structural factors like market power and openness.