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wage and price stickiness causes quizlet

Unformatted text preview: Question 1 All of the following statements are true about the short-run aggregate supply curve except Select one: a. it is a graphical representation of the relationship between production and the price level.b. There is a surplus of Q3-Q2. Wage rigidity – the observation that wages cannot be adjusted downwards – has important implica-tions for labour markets and macroeconomic performance. Economists argued that prices and wages are “sticky… However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). Assume that at this initial point, the growth rate of the money supply is 5%, the growth rate of the velocity of money is 0% and inflation is 1%. d. it is drawn holding price level constant. Though, prices do tend to be more flexible than wages. This causes the growth rate of consumption and the growth rate of investment to fall. To see how nominal wage and price stickiness can cause real GDP to be either above or below potential in the short run, consider the response of the economy to a change in aggregate demand. The price level, in turn, depended on money-wage bargains made between many different groups of workers and employers across the economy as a whole. This study found wage stickiness is more pronounced than price stickiness. Around 15% of wage changes are wage cuts, around 40% of price changes are price cuts. As well as wages being sticky, prices can be sticky. At a price of P2, the supply is greater than demand, meaning firms have excess stock they cannot sell. New Keynesian Economics is a modern twist on the macroeconomic doctrine that evolved from classical Keynesian economics principles. This Feature In other cases, the price may be set above the equilibrium price – leading to excess supply and a surplus. Although this theory explains the problem of unemployment yet does not explain why nominal wage is slow to change. Money illusion is an economic theory stating that many people have an illusory picture of their wealth and income based on nominal dollar terms, rather than real terms. it is a result of the stickiness or inflexibility of some prices and wages. Empirical evidence on the extent, causes and consequences of wage rigidity on the individual level is relatively scant, however. Sticky prices are prices that do not adjust immediately to changing economic conditions. Because wages and prices are sticky and because the economy gets stuck, Keynes said that the government needed to step in and do something to help the economy out. Keynes argued that, if workers in general were to accept lower money wages, the overall price level could not possibly remain unchanged. Firms may pay wages above the market-clearing wage to ensure hard work from its employees and to hold on to their work. By combining stickiness with problems of co­ordinating, this theory can explain the cause of wage stickiness. c. it is upward-sloping. Price above equilibrium. However, because of sticky wages and prices, the wage remains at its original level (W 0) for a period of time and the price remains at its original level (P 0). Assume that wages and prices are sticky and that we start at a long-run equilibrium. Real prices … A modern twist on the macroeconomic doctrine that evolved from classical Keynesian Economics is a modern twist on the level! Ensure hard work from its employees and to hold on to their work are sticky that! Is slow to change meaning firms have excess stock they can not be downwards. Scant, however and that we start at a price of P2, the supply greater... Empirical evidence on the macroeconomic doctrine that evolved from classical Keynesian Economics principles and that we start at long-run. 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