B1 - The Sticky (1) and the imperfect-information model Flashcards
What is the Sticky-Price Model widely used for?
The Sticky-Price Model is widely used in macroeconomic models, including those used by central banks.
What is the key friction in the Sticky-Price Model?
The key friction is that firms do not immediately adjust their prices following a change in demand for their product or service.
Why might firms not immediately adjust their prices after a change in demand? (Reason 1)
One reason is long-term agreements with customers that prevent immediate price changes.
Why might firms not immediately adjust their prices after a change in demand? (Reason 2)
Another reason is ‘menu costs,’ which are the costs associated with changing prices, such as reprinting menus or updating computer systems.
Why might firms not immediately adjust their prices after a change in demand? (Reason 3)
Firms might not adjust prices immediately due to sticky wages, since labor is an important factor of production and wages often adjust slowly.
What are ‘menu costs’ in the context of the Sticky-Price Model?
‘Menu costs’ refer to the costs that firms incur when they change their prices, such as reprinting menus or updating pricing systems.
How do long-term agreements with customers contribute to price stickiness?
Long-term agreements with customers can fix prices over a set period, preventing firms from adjusting prices immediately in response to demand changes.
How do sticky wages affect firms’ pricing decisions in the Sticky-Price Model?
Sticky wages mean that labor costs remain constant in the short-run, making firms less likely to change prices frequently in response to short-term demand fluctuations.
In the Sticky-Price Model, what is a primary factor that causes prices to adjust slowly?
A primary factor is the existence of various frictions, such as long-term agreements, menu costs, and sticky wages.
What is the consequence of firms not immediately adjusting their prices in response to demand changes?
The consequence is that output and employment can deviate from their natural levels in the short-run, leading to temporary economic imbalances.
How does the deviation of output from its natural level relate to the deviation of the price level from its expected level?
The deviation of output from its natural level depends positively upon the deviation of the price level from its expected level.
What is Model 2 about?
Imperfect - information model
What type of SRAS curve does information friction generate?
Information friction generates an upward sloping SRAS curve.
What is the key friction in the information friction model?
The key friction is that suppliers are unable to perfectly observe all prices at all times.
What are the assumptions of the information friction model? (Assumption 1)
Prices are fully flexible (no price stickiness).
