Bryan and Meyer (2010) separate the consumer market basket into “flexible” and “sticky” prices. Debt is the total accumulation of all past deficits and surpluses. Flexible wages: p= 3=4, w= 0 Flexible price: p= 0, w= 3=4 Simulations. Expe­ rience has shown that a market economy does not always have flexible prices. For example, the price of inputs (hourly wages paid to labor and other unit resource prices) remains fixed, or sticky, in the short run. Course Hero is not sponsored or endorsed by any college or university. This extremism results in losing sight of the highest probability outcomes (which is likely to be neither deflation nor hyperinflation). 7. It’s great to have conviction in a belief, but it must be tempered by reality and probability. Prices and wages are NOT flexible … they are “sticky.” It can be used in an effort to close a recessionary or an inflationary gap. Since then, the sticky CPI has edged back up slightly and is now trending at a 12-month growth rate of 1.0 percent. The study referenced above elaborates further: “We find that forecasts of the headline CPI that are based on the sticky-price data tend to be more accurate than the forecasts based on headline inflation. As their research shows, sticky prices appear to have an embedded inflation expectations component that is useful in forecasting future inflation. There are multiple problems when debates over inflation and deflation break out. Increase in AD during a recession puts no pressure on prices Price level Real domestic output, GDP AS Q f AD 47 Q 1 “Sticky Wages” prevents wages to fall. * price. Chegg home. However, the flexible-price assumption is not always a good one. Over time the price level changes (i.e., there is inflation or deflation). What information does a PPC provide for us about a nationÕs economy? This Man Lost Everything Betting on Stocks, even though I maintained for the entirety of 2010 that we were likely to suffer disinflation and then earlier this year forecast low levels of inflation. For most of us, this involves seeing gasoline signs, stock prices, gold prices or other noticeable prices. What are sticky wages and what cause them to exist in an economy? (C) an increase in government spending. View APE Macro Activity 3 4 answers.pdf from ECON 304 at Hebron High School. About This Quiz & Worksheet. These biases combine to lead most of us to constantly fret about near-term price changes in highly visible prices. Find answers and explanations to over 1.2 million textbook exercises. Figure 6.2 Dynamic Responses to a Monetary Policy Shock . – David Foulke, Alpha Architect. That is, wages and prices are fully flexible. There are two types of firms. 2. Economic models that assume wages are flexible predict that anyone willing to work at the going wage can always find a job. Is All of Finance Just a Big Network Effect? John Maynard Keynes wrote: "In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices." Since wages and prices are flexible in the long-run, we will see an increase in both of these after this change in AD. Price ceilings--set below equilibrium price, result in shortages 5. It is called the Flexible CPI. What is the Keynesian view on wage/price flexibility? Although market-clearing models assume that all prices are flexible (adjust for inflation), in the real world some prices are sticky (remain the same for long periods of time regardless of inflation). B) Sticky Wages and Sticky Prices. 22. Thus, in the neoclassical view, changes in aggregate demand can have a short-run impact on output and on unemployment—but only a short-run impact. The firm can sell as many units of the product as it wants for a price of $2. We will understand the sorts of situations for which the sticky-price model is appropriate. What information does a PPC provide for us about a nationÕs economy? Wages are sticky in the sense that they do not move or change quickly, wage demand stake time to adjust to changes in overall price level. give an example of a price that is sticky in the short run and flexible in the long run.? ... give an example of a price that is sticky in the short run and flexible in the long run.? Make sure to correctly label the axes. Three Things I Think I Think – Happy New Year! For the 24-month ahead forecast, the improvement in the RMSE was about 14 percent. The sticky wage theory is an economic hypothesis theorizing that the pay of employed workers tends to have a slow response to the changes in the performance of a company or of the broader economy. Ivy Tech Community College of Indiana • ECON 101, Kennesaw Mountain High School • ECON AP Microec, Florida Virtual High School • AP MACROEC AP MACRO, Briggs Unit 3 Macro Problem Set 2020.docx, University of Illinois, Urbana Champaign • ECON 103, University of California, Irvine • MGMT 4B. sources of large wage and price rigidities: implicit contracts, customer markets, efficiency wages, insider-outsider relationships, and so on. , as Sticky versus Flexible Wages and Prices In macroeconomics there is both a short run and along run. 52. Prices and wages are flexible. policies like taxes, business regulations) C. LONG RUN AGGREGATE SUPPLY (LRAS) 1. There are two types of firms. Difference in changes in quantity demanded or supplied vs change in demand or supply 4. 2. Questions. prices of resources (wages) are NOT flexible. Graphs and Diagrams to be mastered A. Be sure to show on the graph the effects of the oil-price increase. What would eventually happen to the price level and output if the initial price level were P1 rather than P? Define sticky vs. flexible wages. 8 years ago. Sticky versus Flexible Wages and Prices In macroeconomics there is both a short run and a long run. The short run is 148 Advanced Placement Economics Macroeconomics: Student Activities ' National Council on Economic Education, New York, N.Y. 3 Now answer the questions that follow to be sure you understand these concepts. Draw and explain how fiscal policy is used to close the gaps using accurate numbers. We also find that the relative accuracy of the sticky-price Phillips curve increases as the forecast horizon gets longer. A proportion (1 – s) of the firms have flexible prices and set prices … The government should increase spending to close the gap AD 1 There’s more to the story than that. This is where the sticky prices index comes in. prices of resources (wages) are NOT flexible. While rapid price increases in a few categories seem to have pushed up the headline CPI lately, underlying measures of inflation are relatively low and have only ticked up slightly in the past few months.”. What is the difference between debt and deficit? And we will understand under what sets of circumstances wages and prices are flexible enough and have enough time to adjust for the flexible- Define and give examples of the determinants of aggregate supply. Increase in AD during a recession puts no pressure on prices Price level Real domestic output, GDP AS Q f AD 47 Q 1 “Sticky Wages” prevents wages to fall. 148 Advanced Placement Economics Macroeconomics: Student Activities ' National Council on Economic Education, New York, N.Y. 3 Now answer the questions that follow to be sure you understand these concepts. c. Define sticky vs. flexible wages and prices. ter 12 we will have linked up the sticky-price model of Part 4 with the flexible-price model of Part 3. ... Macroeconomics Aggregate Supply Sticky versus flexible wages and prices. 2 Answers ... EVETS. Define sticky vs. flexible wages and sticky vs. prices. We wrote this as p = P + a(Y – Y). What is the Classical view on wage/price flexibility? But we must remember not to be too biased about near-term highly visible price increases. In the space below, draw the firm’s demand curve for labor. topics include sticky wage theory and menu cost theory, as well as the causes of short-run aggregate supply shocks. Use the AD and SRAS model in Figure 46.6 to show the appropriate policy response to the oil-price increases in the following instances. In this lesson summary review and remind yourself of the key terms and graphs related to short-run aggregate supply. Advanced Placement Economics Macroeconomics: Student Activities ' National Council on Economic Education, New York, N.Y. 97 Use the following information for a hypothetical economy to answer questions 14 and 15. In addition, humans tend to have very short memories resulting in attentional biases. ... economics questions and answers; ... Sticky prices means that price do not change despite the change in … Wage stickiness is a large component of Keynesian economics. 3.4, 3.5 and 3.6. For example, the prices for magazine subscriptions remain the same and do not change for years. 5 Macroeconomics LESSON 3 ACTIVITY 46 Answer Key UNIT 3. "While Ben Graham was the consummate 'bottom up' investor, it could be said that Cullen Roche is the consummate 'top down' investor." Skip Navigation. As is evident in the figure below, the flexible price series is definitely more volatile, and does appear to vary with changing economic conditions. New oil discoveries cause large decreases 7. ( ____/3) 4. About This Quiz & Worksheet. ( ____/18 Points) … Short-run and long-run analyses. Illustrate the effects of an increase in aggregate in energy prices. The sticky price series has been relatively stable since 1983, usually hovering between 2.0 percent and 3.0 percent. Define and give examples of the determinants of aggregate demand. In the long run, when wages and prices are flexible, potential GDP and aggregate supply determine the size of real GDP. Macroeconomics LESSON 5 ACTIVITY 25 UNIT Activity written by John Morton, National Council on Economic Education, New York, N.Y., and James Stanley, Choate Rosemary Hall, Wallingford, Conn. P P1 SRAS AD Y REAL GDP ACTIVITY 2-4 Price Indices and Real versus Nominal Values Real versus Nominal Values Prices in an economy do not stay the same. That is, wages and prices are fully flexible. ( ____/1) d. Graph the following curves (on the same graph): AD, SRAS and LRAS. In the sticky-price model, all firms have a desired price p that depends on the overall level of prices P as well as the level of aggregate demand Y – Y. Use this interactive worksheet and quiz combo as a pre-test or review for our lesson on the effects of sticky wages and prices on equilibrium. What is the Keynesian view on wage/price flexibility? The value of real output and price levels may also be 3. Not so fast. this chapter. Marginal physical product is just the change in total output when one more worker is hired. ( ____/12) Key Concepts Define and explain each concept and give specific examples: a. Wages are sticky as a result of labor contracts and a wage decrease which results in low worker morale. (D) a constant level of government spending. For example, when predicting three months ahead, we find that the sticky-price Phillips curve reduces the RMSE of the forecast only about 2 percent relative to the headline CPI. What he was saying is that wages are sticky downwards. For example, if prices were doubled and wages and other input costs doubled, there would be no effect. 6, 7, and 8 — means that Part 3 is devoted to full-employment flexible-price macro­ economics. SHORT-RUN: Nominal wages and other input prices remain constant (fixed) as the price level changes. Use the graphs in Figure 29.1 in your answers. What is the difference between debt and deficit? The government should increase spending to close the gap AD 1 An expansionary monetary policy may promote long-run growth if it leads to (A) an increase in consumption. Productivity 3. Exchanges rates belong to the flexible prices category, i.e., the opposite of sticky prices. This means that any time the price level changes (i.e., there is inflation or deflation), wages and other input costs fully adjust so there is no overall effect. Aggregate Supply. So while surging flexible prices are important to keep an eye on it’s equally important to remember that flexible prices are only one piece of the overall inflation story. We wrote this as p = P + a(Y – Y). N. Distinguish between sticky-price and sticky-wage models and flexible price and wage models; identify the effect of these differences on the AS curve III. 16. short run: In macroeconomic analysis, a period in which wages and some other prices are sticky and do not respond to changes in economic conditions. Sticky wages and/ or sticky prices cause the AS curve to be positively sloped. And as we learned in 2008 a short-term spike in flexible prices can occur just months before a nasty deflationary event. ... through the interest rate, income and the price level. Further, CPI predictions using sticky-price data perform pretty well relative to CPI forecasts using core CPI data.6,7. demand. If instead the environment features sticky prices and flexible wages, as in Schmitt-Grohe and Uribe (2004b) and Siu (2004), there are two economic forces acting on price inflation: the money demand function and price-setting behavior on the part of firms. A change in the price level changes the value of economic measures denominated in dollars. When there is a short-run increase in AD, the price level and real GDP increase (move from AD to AD1). ... Fiscal policy is the use of government expenditures and taxes to influence the level of economic activity. (Put the number of workers on the horizontal axis and the hourly wage rate on … Input prices for land, labor, capital, entrepreneurship (rent, wages, interest, profits)— influenced by domestic resource availability and prices of foreign inputs (positive and negative supply shocks) 2. Debt is the total accumulation of all past deficits and surpluses. There are multiple problems when debates over inflation and deflation break out. While gasoline prices may be gyrating on a daily basis the price of many other goods and services (such as your rent or mortgage cost) remains relatively constant. ( ____/1) d. ... To support your answer in part (a), draw a recessionary gap and an inflationary gap. (C) Wage and price controls are imposed. 0 2 4 6 8 10 12 14 16-0.4-0.3-0.2-0.1 0 0.1 output gap baseline flexible wages flexible prices 0 2 4 6 8 10 12 14 16 problem set unit 6 - Paige Koritz 15 December 2016 AP Macroeconomics Unit VI Problem Set Aggregate Demand Aggregate Supply and Fiscal Policy 1 Aggregate, 7 out of 8 people found this document helpful, Aggregate Demand, Aggregate Supply, and Fiscal Policy. 2. And we will understand under what sets of circumstances wages and prices are flexible enough and have enough time to adjust for the flexible- They are "sticky". O Export Equal Imports O The Price Level Is At Its Lowest Level. Understanding Sticky Wage Theory . Answer Save. Figure 24.1 ... 3 Macroeconomics LESSON 4 ACTIVITY 24 Answer Key UNIT P R I C E L E V E L REAL GDP A B C Figure 24.2 Price level: — Price level: — Real GDP: — Real GDP: — 6. Nonetheless, because I reject the notion of hyperinflation or even high inflation I am pegged as the extreme opposite – a deflationist. Aggregate Demand/Aggregate Supply Model (Short-run and Long-run) B. There is, however, downward pressure on the price level. (A) If unemployment were the main concern of policy makers Figure 24.1 ... 3 Macroeconomics LESSON 4 ACTIVITY 24 Answer Key UNIT P R I C E L E V E L REAL GDP A B C Figure 24.2 (B) an increase in investment. Question: QUESTION 13 Sticky Wages Are Caused By O Sticky Prices O Menu Prices 0 Union Contracts O Price Flexibility QUESTION 14 The Equilibrium Price Level And Level Of Real GDP Occur Where: O Real Output Is At Its Highest Possible Level. (D) The exchange rate is fixed. Gasoline prices are rising in the last few months so it must mean that we are on the verge of hyperinflation, right? (B) Have the students start Activity 23 in class and complete for homework. The primary problem is that humans tend to be extreme in their beliefs. The short run is Indicate shifts in the curve by S and move-ments along the curve by A. What is the Keynesian view on wage/price flexibility? View all chapters. Sticky … future prices, taxes or subsidies, technology, prices of other goods 3. This index prices the more volatile measures of CPI and if you look at the chart below you’ll likely relate to the price changes better. AP Macroeconomics Review - with Answers Page 13 51. 17. sticky price: A price that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus. This means that any time the price level changes (i.e., there is inflation or deflation), wages and other input costs fully adjust so there is no overall effect. The flexible CPI, which fell to a year-over-year growth rate of -10 percent during the depths of the last recession, has popped back up to a 12-month growth rate of 3.4 percent through January.” “The flexible CPI is intriguing in that, by design, it is likely to show evidence of pricing pressure ahead of the sticky CPI. Why would this happen? Sticky versus Flexible Wages and Prices In macroeconomics there is both a short run and a long run. between production and the price level in the short run. 6 Macroeconomics LESSON 4 ACTIVITY 54 Answer Key UNIT How Monetary and Fiscal Policies Affect Exchange Rates Changes in a nation’s monetary and fiscal policies affect its exchange rates and its balance of trade through the interest rate, income and the price … For example, if prices were doubled and wages and other input costs doubled, there would be no effect. Gasoline (UK: Petrol) We do not see the price of gas (British English: petrol) going up or down as quickly as currencies. Some­ times prices and wages turn out to be sticky, or sluggish, or stuck. Wages and prices may be slow to adjust, or sticky, if firms or workers lack information. Wages are sticky in the sense that they do not move or change quickly, wage demands take time to adjust to changes in overall price level. A change in the price level changes the value of economic measures denominated in dollars. whether the price is a product price, a wage, interest or rent. 1 Answer … (E) The Federal Reserve sells government bonds. Aggregate supply (AS) 3. Price floors--set above equilibrium price, result in surpluses Price S Price Floor P e Price … Consumption 1. For instance, I am often taken out of context as a deflationist even though I maintained for the entirety of 2010 that we were likely to suffer disinflation and then earlier this year forecast low levels of inflation in 2011. - Sticky versus flexible wages and prices - Determinants of aggregate supply Macroeconomic equilibrium - Real output and price level - Short and long run - Actual versus full-employment output - Business cycle and economic fluctuations Vocabulary 1. Yes, inflation really did feel high in 2007 & 2008 despite the low readings in the core CPI. topics include sticky wage theory and menu cost theory, as well as the causes of short-run aggregate supply shocks. (C) Have the students complete Activity 22 for homework. The Cleveland Fed elaborates on these indices: “Another way to analyze the incoming data is to look at where the price increases are coming from. The price of buying one dollar with another currency changes rapidly. 18. Because wages and prices are sticky and because the economy gets stuck, Keynes said that the government needed to step in and do something to help the economy out. View APE Macro Activity 3 4 answers.pdf from ECON 304 at Hebron High School. 1. Macroeconomics Aggregate Supply Sticky versus flexible wages and prices. Thus the Sticky wages and/ or sticky prices cause the AS curve to be positively sloped. Use this interactive worksheet and quiz combo as a pre-test or review for our lesson on the effects of sticky wages and prices on equilibrium. Prices and wages are NOT flexible … they are “sticky.” Since our economy is characterized by big businesses and unions, businesses are unlikely to lower wages. Because wages and prices are sticky and because the economy gets stuck, Keynes said that the government needed to step in and do something to help the economy out. Changes in the value of a country’s currency may affect the balance of trade and aggregate demand. Thus, the existence of highly flexible wages and prices implies an AS curve that is vertical at the full-employment level of output (potential GDP), as represented in Exh. Over time the price level changes (i.e., there is inflation or deflation). In the case of inflation we tend to focus on what has happened only just recently as opposed to what has happened around us over the course of several months or years. The problem is that these phenomena imply rigidities in real wages and prices, while the Keynesian theory depends on rigidities in nominal wages and prices. The short run is the time period in which at least one factor is fixed. As a result, inflation forecasts based on the flexible CPI perform rather poorly. Wages are sticky as a result of labor contracts and a wage and the short-run effect on real GDP and the price level. But the story was not complete just because flexible prices were surging. When many were fretting about inflation their concerns were not without merit, however, they weren’t entirely accurate when one pulls back and looks at prices as a whole. This doesn’t mean that flexible prices are always wrong. Flexible-priced items (like gasoline) are free to adjust quickly to changing market conditions, while sticky-priced items (like prices at the laundromat) are subject to some impediment or cost that causes them to change prices infrequently. Title: 978-1-56183-668-0-activity-unit-03.pdf Author: Owner Created Date: 1/9/2019 3:06:27 PM “The flexible CPI is intriguing in that, by design, it is likely to show evidence of pricing pressure ahead of the sticky CPI. However, over the past two years the sticky CPI has experienced a sizeable disinflation—slowing from a year-over-year growth rate of 2.8 percent in December 2007 to a low of 0.7 percent in September 2010. ter 12 we will have linked up the sticky-price model of Part 4 with the flexible-price model of Part 3. Try our expert-verified textbook solutions with step-by-step explanations. ACTIVITY 2-4 Price Indices and Real versus Nominal Values Real versus Nominal Values Prices in an economy do not stay the same. this chapter. Get an answer for 'True or False: The more flexible wages and prices, the steeper the short-run aggregate supply curve. 52. However, the series is very volatile relative to its sticky-price counterpart and likely dominated by relative price changes. An increase in wages means resource costs are increasing, which makes it more expensive for firms to produce their goods. the answers with the students. - Sticky versus flexible wages and prices - Determinants of aggregate supply Macroeconomic equilibrium - Real output and price level - Short and long run - Actual versus full-employment output - Business cycle and economic fluctuations Vocabulary 1. O The Aggregate Demand And Supply Curves Intersect. Aggregate demand (AD) 2. Monetary and Fiscal Policy in a Global Economy. Week 2 Day 6 (A) Review Activity 22. Books. ( ____/4) 2. Indicate the changes in price level, unemployment and real GDP with an up arrow for an increase and a down arrow for a decrease. For example, the price of inputs (hourly wages paid to labor and other unit resource prices) remains fixed, or sticky, in the short run. Aggregate demand (AD) 2. … In fact, it changes by the minute. LONG-RUN AGGREGATE SUPPLY: 1. Use Activity 55 as a review for the unit test. The flexible-price measure, at least on the surface, does not seem to forecast well, and it performs increasingly worse as the forecast horizon gets longer.”. The Cleveland Fed recently devised an inflation index that most readers can likely relate to. This preview shows page 1 - 2 out of 3 pages. The primary problem is that humans tend to be extreme in their beliefs. Workers may not realize that their real wages have changed due to inflation (or deflation) and therefore have not adjusted their labor supply and wage … SHORT-RUN vs. c. Define sticky vs. flexible wages and prices. 8. There is too often no room for middle ground. Day 7 (A) Continue discussion of aggregate demand using Visual 3.8. Day 8 (A) Review Activity 23. Featured Answers Topics Sticky versus flexible wages and prices. Wage stickiness is a large component of Keynesian economics. , as Sticky versus Flexible Wages and Prices In macroeconomics there is both a short run and along run. We will understand the sorts of situations for which the sticky-price model is appropriate. However, this is not true because of unemployment; thus, we consider that wages are sticky and adjust SLOWLY to changes in the market. AP Macroeconomics Review - with Answers Page 13 51. Prices and wages are NOT flexible … they are “sticky.” Based on the same graph ): AD, SRAS and LRAS is! Just the change in the long run aggregate supply ( LRAS ) 1 Part 4 with the flexible-price of... Expe­ rience has shown that a market economy does not always a good one growth if it to. One factor is fixed low readings in the value of economic Activity 46.6 to show the policy... Series has been relatively stable since 1983, usually hovering between 2.0 percent and percent! Prices can occur just months before a nasty deflationary event ( ____/12 key... As we learned in 2008 a short-term spike in flexible prices category i.e.! The RMSE was about 14 percent flexible … they are “sticky.” *.! And probability ( a ) review Activity 22 or endorsed by any college or university inflation deflation! Labor contracts and a wage what is the total accumulation of all past deficits and surpluses price of 2... A country ’ s great to have an embedded inflation expectations component that is useful in forecasting future.... That flexible prices - 2 out of 3 pages a recessionary gap and inflationary. 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