Price and Wage Setting Equation Flashcards
1
Q
What is the price-setting equation?
A
P = (1 + u) W/lambda
2
Q
Assumption behind one for one nominal wage and price increases.
A
We assume constant productivity.
3
Q
How do nominal wage increases affect firms profits?
A
Firms responding instantly to increases in wages by raising prices. This means the changes in the nominal wage are matched by a proportionate price increase.
