If a firm believes that their relative price has changed, then they will increase their output, since theirproduct is more valuable (in relative price terms). Thus, the output of firms will be Y = Y +x (P - EP)where alpha is the relative increase in work driven by an increase in expected price levelThirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200,then draw the SRAS curve around the potential output of $10,000. Then, determine the increasein price above expectation if 40% of firms are sticky-price firms, flexible price firms respond witha=0.02 and Y rises by $2400.

The above given is a problem of Sticky price model which can be solved as follows:

If a firm believes that their relative price has changed, then they will increase their output, since their product is more valuable (in relative price terms). Thus, the output of firms will be Y = Y +x (P – EP) where alpha is the relative increase in work driven by an increase in expected price level %3D Thirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200, then draw the SRAS curve around the potential output of $10,000. Then, determine the increase in price above expectation if 40% of firms are sticky-price firms, flexible price firms respond with a=0.02 and Y rises by $2400.

If a firm believes that their relative price has changed, then they will increase their output, since their product is more valuable (in relative price terms). Thus, the output of firms will be Y = Y +x (P – EP) where alpha is the relative increase in work driven by an increase in expected price level %3D Thirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200, then draw the SRAS curve around the potential output of $10,000. Then, determine the increase in price above expectation if 40% of firms are sticky-price firms, flexible price firms respond with a=0.02 and Y rises by $2400.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.7P

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