AS-AD model Flashcards
What are the three models of SRAS?
- Sticky wage model
- Sticky price model
- Imperfect information model
The sticky wage model assumes:
Firms and workers negotiate contracts and fix the nominal wage before they know what the price level will turn out to be
If P = Pe, then:
Unemployment and output are at their natural rate
If P > Pe, then:
Real wage is less than its target. so firms hire more workers and output rises
If P < Pe, then:
Real wage exceeds its target, so firms hire fewer workers and output falls below natural rate
The sticky wage model implies that real wage should be:
Counter cyclical
What are some reasons for sticky prices?
- Long term contracts between firms and customers
- Menu costs
- Firms not wishing to annoy customers with frequent price changes
In the sticky price model, an individual firm’s desired price is:
p = P+a(Y-Y(bar))
Where a > 0
What are the assumptions of the imperfect information model?
- All wages and prices are perfectly flexible, and all markets are clear
- Each supplier produces one good and consumes many goods
- Each supplier knows the nominal price of the good they produce but doesn’t know the overall price level
What’s the definition of cyclical unemployment?
The deviation of the actual rate of unemployment (U) from the natural rate (Un)
The phillips curve states that π depends on:
Expected inflation Eπ
In the SRAS curve, output is related to:
Unexpected movements in the price level
In the Phillips curve, unemployment is related to:
Unexpected movements in the inflation rate
Adaptive expectations is an approach that assumes people:
Form their expectations of future inflation based on recently observed inflation
What is cost push inflation?
Inflation resulting from supply shocks
