Business Cycle Theory :: essays research papers

The Sticky- hire layIn this manikin, economists pursue the sluggish determinement of titular meshs path to explain why it is that the short-term aggregate try curve is upward sloping. For sticky token(a) wages, an increase in the toll take lowers the authorized wage therefore making constancy cheaper for firms. Cheaper wear out means that firms leave hire more labor, and the increased labor will in turn produce more output. The time period where the nominal wage cannot adjust to the changes in damage take and output signifies the decreed sloping aggregate supply curve.The nominal wage is invest by the workers and the firms based on the target true wage, which may or may not be the labor supply & contend equilibrium, and on harm aim expectation.W = * Pe Nominal remuneration = Target Real Wage * Expected Price LevelAfter the nominal wage has been set scarce before any hiring, firms learn the actual price level (P). From this the real wage is derivedW/P = * P e/PReal Wage = Target Real Wage * Expected Price Level/ echt Price LevelFrom the equation, real wage = target real wage when expected price level = actual price levelreal wage target real wage when expected price level actual price levelreal wage target real wage when expected price level actual price levelThe bargaining between workers and firms determine the nominal wage rate but not the actual level of employment. This is determined by the firms hiring decisions and the labor demand functionL = Ld(W/P)Output is determined by the production function, Y = F(L). The aggregate supply curve, under the sticky-wage model, summarizes the two functions and the relationship between the price level and output. Any unexpected changes in the price level bring a deviation in the real wage, which in turn, affects the amount of labor and output.The major weakness of the sticky-wage model however, is that in any model with an constant labor demand curve, unemployment falls when the real wag e falls. Under this model the opposite happens, which means that the real wage should be countercyclical. Economic entropy over the past decades in the U.S. shows that the real wage in item tends to rise along with output. This is evidence contrary to Keynes predictions in the General Theory.The Imperfect-Information ModelCharacteristicsAssumes that the market is clear all wages and prices are free to adjust in order to balance supply and demand and that differences in the short-run and long-run aggregate supply curves are from misperceptions about prices