Answer to Question #276494 in Macroeconomics for Kay

Question

Q.1 a) According to the misperceptions theory, what effect does a reduction in the actual price level have on

the amount of output supplied by producers? Explain using labour market analysis.

b) Will there be any relationship between inflation and unemployment either in the short run or in the

long run in the context of part (a)? What factors account for the different opinions of economists about

this relationship?

c) What is price stickiness? Why do New Keynesians believe that allowing for price stickiness in

macroeconomic analysis is important?

Answer 1

Sticky wage idea is connected to misperception theory. When the price drops, the supplier's expectations aren't met. There will not be full employment of output due to the predicted reduction in price level.