This means that some (but not all) sellers must change their prices. The Great Recession of 2007-09 was triggered by a: A. Is it possible to expand output above potential? The high level of output attracts high demand for goods and services. In this essay, we want to challenge the idea that these policy implications are necessarily correct (even if prices are sticky). Rather, the economy may operate either above or below potential output in the short run.
Long-run equilibrium occurs at the intersection of the aggregate demand curve and the long-run aggregate supply curve. Average price level in the economy B. Taylor, J. When sales fall in a company, the company doesn’t resort to cutting wages. “Expectations and the Neutrality of Money.” Journal of Economic Theory 4, 103-24. In these cases, wage stickiness may stem from a desire to avoid the same uncertainty and adjustment costs that explicit contracts avert. More current consumption C. More future production D. More future inflation, Which of the following is the best example of financial investment? He describes a model consistent with the empirical observation that there is a positive correlation between the aggregate price level (or money supply) and output (or employment), but policymakers in this model cannot systematically exploit the relationship: Increasing inflation by printing money at a faster rate will not increase average output or employment. 1. The intersection of the economy’s aggregate demand curve and the long-run aggregate supply curve determines its equilibrium real GDP and price level in the long run. The short run in macroeconomic analysis is a period in which wages and some other prices do not respond to changes in economic conditions. Economic Policy Papers are based on policy-oriented research produced by Minneapolis Fed staff and consultants. 0 0 In contrast, in the short run, price or wage stickiness is an obstacle to full adjustment. 1 To state this notion with simple math: Suppose the economy starts in an equilibrium with money supply M, nominal price level P and real allocation (consumption, investment, employment and so on) X. Wage or price stickiness means that the economy may not always be operating at potential. Price stickiness (or sticky prices) is the resistance of market price (s) to change quickly despite changes in the broad economy that suggest a different price is optimal. We know that sometimes it's hard to find inspiration, so we provide you with hundreds of related samples. Then change M Negative demand shock B. Figure 7.8. Output per person necessarily decreases C. Output per person necessarily remains unchanged D. There is not enough information to determine what happens to output per person, Purchasing power parity refers to: A. There is a growing sense of optimism that Greece and its creditors will strike a deal. The economy shown here is in long-run equilibrium at the intersection of AD1 with the long-run aggregate supply curve. In the sticky‐price model, if no firms have flexible prices, the short‐run aggregate supply schedule will: A) be vertical. By “sticky” prices, we mean the observation that some sellers set prices in nominal terms that do not adjust quickly in response to changes in the aggregate price level or to changes in economic conditions more generally. Uploading copyrighted material is not allowed. Some economists dispute classical neutrality. Hence, the change in M has no effect on anything real. Price stickiness can also be referred to as "nominal rigidity" and is related to wage stickiness. A restaurant owner buys a freezer to store ingredients for the restaurant meals B.
With aggregate demand at AD1 and the long-run aggregate supply curve as shown, real GDP is $12,000 billion per year and the price level is 1.14. This stickiness means that changes in the money supply have an impact on the real economy, inducing changes in investment, employment, output, and consumption.
1985-87 C. 1992-94 D. 2007-09, The major statistics that provide macroeconomists a picture of the health of an economy include the following, except: A. (2015) for a recent survey of the literature on monetary economic theory. When the economy achieves its natural level of employment, it achieves its potential level of output.
Why these deviations from the potential level of output occur and what the implications are for the macroeconomy will be discussed in the section on short-run macroeconomic equilibrium. Is a measure of the overall level of prices B. Whatever the nature of your agreement, your wage is “stuck” over the period of the agreement. Business cycles C. Inventory cycles D. Recession and inflation, The period when output and living standards decline is referred to as: A. In the sticky price model appositive relation between price and output exists in the short run. The actual demand for goods and services ends up being more or less than the expected supply of goods and services C. The actual demand for goods and services ends up being more or less than what firms were expecting D. Prices tend to be flexible in the short run, If prices of goods and services are free to quickly adjust, then: A. the quantities demanded and supplied of goods and services, D. Unemployment will not change in Real gross domestic product B. Hence we also find that a higher expected price level would lead to a ride in the actual price level. Or they simply impose by decree that a seller can adjust price only at a few points in time determined by pure chance. Both parties must keep themselves adequately informed about market conditions. Think about your own job or a job you once had. Rotemberg, J. 2. An increase in nominal GDP C. A decrease in real GDP D. A decrease in nominal GDP, Suppose a family’s income increases by 5% at the same time that inflation is 6%. D) be horizontal. Sticky-down refers to the tendency of a price to move up easily but prove quite resistant to moving down. Inaugural 'Distinguished Leader in Residence' at New York University. The economy could, however, achieve this real wage with any of an infinitely large set of nominal wage and price-level combinations. Consider next the effect of a reduction in aggregate demand (to AD3), possibly due to a reduction in investment.
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