Abstract
The efficiency wage theory is generally regarded as a plausible explanation as to why wages do not fall to clear labor markets in the presence of involuntary unemployment. At the current stage of its development, not much is said concerning the role of nominal money and the fluctuations in aggregate employment and output. Adopting the efficiency wage theory, this paper uses the idea of partial rigidity of wages in an attempt to explain why changes in money supply and other demand management policies can cause fluctuations in aggregate employment and output.
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