SRAS and Phillips Curve

Mankiw - Ch.15

What does an increase in AD have on the SRAS curve?

shifts in AD only affect output in Sr and only effect price in Lr

How us price level, P weighted?

How much is consumed

What are the 2 different types of frictions?

1. Sticky prices - some fraction of prices are fixed and the remainder are flexible (P can change in SR but not entirely)

2. Imperfect information -  the general price level is not perfectly observed (better to be able to explain where something comes from)

When is sticky prices not realistic?

The possible exception of a deep recession/depression.

What is the equation for SRAS?

What is the equation for Price level?

What does the line for SRAS look like?

Upward sloping?

What is the key friction that leads to the Sticky-Price Model?

Firms don’t immediately adjust their prices following a change in demand for their g/s

Why does the key friction for the Sticky-Price Model arise?

• long term agreements with customers -e.g. contracts

• menu costs - costly for firms to change prices - time + effect + money cost → don’t change

• sticky wages - labour is an important F.o.P - firms cant decrease wages → don’t decrease prices

What is an individuals Firm’s ‘desired’ price (p)?

What they would like to set if they could

firms would set the price p if they were able to adjust continuously

What are the 2 groups of firms?

Firms with flexible prices - always set desired price:

• p = P +a(Y-Y¬)

Firms with sticky prices - set price in advance

• p = EP + a(EY -EY¬)

• based on expectations

• assume EY = EY¬, then p = EP f

Why are there 2 groups of firms

Not all able to change prices at the same time

What is the equation for the General price level?

weighted average of the prices set by the 2 groups of firms