Problem :
What are the four major models of aggregate supply?
There are four major models that explain why the short-run
aggregate supply curve slopes upward. The first is the
sticky-wage model. The
second is the worker-misperception model.
The third is the imperfect-information model.
The fourth is the sticky-price model.
Problem :
Explain the chain of events that causes the aggregate demand
curve to be upward sloping according to the sticky-wage model.
The chain of events that leads from an increase in the price
level to an increase in output in the sticky-wage model: when
the price level rises, real wages fall; when real
wages fall, labor becomes cheaper; when labor becomes
cheaper, firms hire more labor; when firms hire more labor,
output increases.
Problem :
Explain the chain of events that causes the aggregate demand
curve to be upward sloping according to the worker-
misperception model.
The chain of events that leads from an increase in the price
level to an increase in output in the worker-misperception
model: when the price level rises, firms increase nominal
wages; when nominal wages increase, workers-- due to
misperceptions--believe that real wages also increase; when
workers believe that real wages increase, workers provide more
labor; when workers provide more labor, output increases.
Problem :
Explain the chain of events that causes the aggregate demand
curve to be upward sloping according to the imperfect-
information model.
The chain of events that leads from an increase in the price
level to an increase in output in the imperfect-information
model: when the overall price level rises, producers mistake
it for a relative increase in the price level. When the
relative price level rises, the real wage earned by producers
rises. When the real wage earned by producers rises, the
amount of labor supplied by producers increases. When the
amount of labor supplied by producers increases, output
increases.
Problem :
Explain the chains of events that cause the aggregate demand
curve to be upward sloping according to the sticky-price
model.
Following are summaries of the two chains of events that
characterize the relationship between the price level and
output in the sticky-price model. First, when firms expect a
high price level they set their relatively sticky prices high.
Other firms follow suit and set their prices high as well.
Thus, a high expected price level leads to a high actual price
level. When the expected price level is high, producers
produce more output. Second, when the level of output is
high, the demand for goods and services is also high. When
the demand for goods and services is high, the price charged
for goods and services is also high. When the price charged
for goods and services is high, firms set their relatively
sticky prices high. When some firms set their relatively
sticky prices high, other firms follow suit. Thus, the
overall price level increases.
