Business Cycle Theory :: essays research papers

The Sticky-profit beatIn this instance, economists pursue the sluggish alterment of tokenish earningss path to explain why it is that the short-run aggregate lend curve is upward sloping. For sticky nominal wages, an increase in the footing aim lowers the pointual wage therefore making projection cheaper for firms. Cheaper push back means that firms give hire more labor, and the increased labor will in turn produce more output. The time period where the nominal wage cannot adjust to the changes in impairment aim and output signifies the constructive sloping aggregate supply curve.The nominal wage is discipline by the workers and the firms based on the target documentary wage, which may or may not be the labor supply & direct equilibrium, and on outlay level expectation.W = * Pe Nominal earnings = Target Real Wage * Expected Price LevelAfter the nominal wage has been set unless before any hiring, firms learn the actual price level (P). From this the real wag e is derivedW/P = * Pe/PReal Wage = Target Real Wage * Expected Price Level/ material Price LevelFrom the equation, real wage = target real wage when expected price level = actual price levelreal wage target real wage when expected price level actual price levelreal wage target real wage when expected price level actual price levelThe bargaining between workers and firms determine the nominal wage rate but not the actual level of employment. This is determined by the firms hiring decisions and the labor demand functionL = Ld(W/P)Output is determined by the production function, Y = F(L). The aggregate supply curve, under the sticky-wage model, summarizes the two functions and the relationship between the price level and output. Any unexpected changes in the price level commence a deviation in the real wage, which in turn, affects the amount of labor and output.The major weakness of the sticky-wage model however, is that in any model with an motionless labor demand curve, unemp loyment falls when the real wage falls. Under this model the opposite happens, which means that the real wage should be countercyclical. Economic information over the past decades in the U.S. shows that the real wage in fact tends to rise along with output. This is evidence contrary to Keynes predictions in the General Theory.The Imperfect-Information ModelCharacteristicsAssumes that the market is clear all wages and prices are free to adjust in order to balance supply and demand and that differences in the short-run and long-run aggregate supply curves are from misperceptions about prices