Question 1

What is the flaw of the sticky wage model?

Accepted Answer

Implies that the real wage should be counter-cyclical , it should move in the opposite direction as output over the course of business cycles: In booms, when P typically rises, the real wage should fall. In recessions, when P typically falls, the real wage should rise. •This prediction does not come true in the real world --\> the real wage has actual been shown to be pro-cyclical, meaning when we have booms wages increase and in recessions they decrease or acyclical meaning it has no relationship with economic cycles

Question 2

What are the two pieces of empirical evidence about the sticky-wage model?

Accepted Answer

Barsky and Solon (1989) Sumner and Silver (1989)

Question 3

What did Barsky and Solon (1989) say about the sticky-wage model?

Accepted Answer

Barsky and Solon (1989) starts by quoting three studies, all published in the 1980s, which concluded that real wages were, in turn, acyclical, procyclical, and countercyclical. Looking at industry-wide data, Barsky and Solon (1989) find that there is little if any evidence of countercyclical real wages. Studies of micro data, however, provide quite strong evidence of procyclicality in the real wage. --\> which correlates with wages in the US real wage --\> output are real wage rise together Barsky and Solon (1989) find procyclicality when they look at data from the Panel Study of Income Dynamics, which studies the behavior of individual households. These findings are broadly in accordance with those of Bils (1985), who studied microeconomic data from the National Longitudinal Survey.

Question 4

What did Sumner and Silver (1989) say about the sticky-wage model?

Accepted Answer

Sumner and Silver (1989), note that results on the cyclicality of the real wage are sensitive to sample period. the data are consistent with sticky-wage theories. Basically, their argument is that shocks to aggregate demand will cause prices to be procyclical and shocks to aggregate supply will cause prices to be countercyclical. If nominal wages are sticky, then we should observe procyclical real wages when inflation is countercyclical, and vice versa. This is borne out by the data.

Question 5

What are reasons for sticky prices?

Accepted Answer

Firms do not always change their prices immediately when AD changes and they remain the same for a shoret-period of time, so reasons for this are: Long-term contracts between firms and customers menu costs --\> cost of repricing (changing on computer systems, menus, on shelfs, new barcodes) firms do ot wish to annoy customers with freuqent price changes

Question 6

What is the assumption for the stick-price model?

Accepted Answer

Firms set their own prices (as in monopolistic competition)

Question 7

What assumption do we make about sticky-price firms?

Accepted Answer

That EY = EY(bar) thus making the bracket 0 Using this assumption the pricing strategy for the sticky-price firm is p=EP --\> just based on expected prices

Brainscape's Knowledge GenomeTM

L5 - Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment Flashcards

Brainscape's Knowledge Genome^TM