NK model with sticky prices Flashcards
Output gap in NK sticky model and compare to BRC model
-In RBC model prices felxible allocations are said to be opitimal compared to frictinos in sticky NK model which lead to sub optimal outcomes, outputs differ from both models, output gap.
-Output gap optimal output - output in NK sticky model
-Gaps are ineffients and provide incentive to policy intervention to reduce, optimal polices minimise output gap.
-OG is 0 in RBC model.
Eg) effect of expansive monetary policy in the NK sticky price model
-Assume expansive monetary policy, central bank lowers r, representing a movement along the YD curve (YS is irrelavant as firms satisfy demand). Increase in Y
-Lower r –> fall in NS labour supply, intertemporal substiution effect.
-Higher income Y, increases in the demand for money however central bank responds by altering the money supply such that there is no change in interest rate/price as a resuly of change in MD.
-Money not neutral
-Explain all effects
Eg) effect of fiscal policy eg g increase in the NK sticky price model
-G increase increase in YD, prove using formula moves one for one. No shift movement along curve, model shows change in r but central bank sets r.
-Y has increased in the goods market thus increase in demand for money MD.
-Labour demand also increases as firms need to meed new increase in YD, hire labour to meet requirements
-Conclude with all effects
NK sticky prices model assumptions
-Model adds firm control over price setting rather than price takers and perfect competition in previous models such as RBC.
-Large n firms, with ‘some control’ over price setting (market filled with non perfect substitutes, competitive but not idential)
-Behaviour of HH and firms identical to RBC.
-MON policy in SR isnt neutral and NOM interest rate is the tool (only effects non variables)
-Central bank controls/sets r in SR, r is eogenous MS is endo.
-Firms are not placed on YS as they satisfy demand in the model, no role for YS (cant shift). HH’s always on Ns shedule.
