ECON 200 Problem Set 9 Solutions Fall 2007

ECON 200 Problem Set 9 Solutions Fall 2007 - Economics 200...

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Economics 200 Macroeconomic Theory Solution to Problem Set 9 Recall that, in the sticky-price model, the curve is given by where is the WVEW T œ T  ] ] = / +Ð"=Ñ = ±² fraction of ( produced by) fixed price firms. As decreases from unity to zero the curve becomes steeper KHT = but it continues to go through the point . This means that the curve rotates around the point ]ßT / 1 = / as decreases as shown in the diagram below. Also shown in that diagram is the shift in the aggregate demand curve from to due to the rise in government spending. HH !" The short-run response of the economy to this rise depends on the slope of the curve. When all the firms are fixed-price firms the price level does not change and we observe an increase in equal to Ð= œ "Ñ KHT the rise in aggregate demand – all firms respond to the higher demand only by increasing output. When there are some fixed-price and some flex-price firms, , the short-run response is partly a rise in and !=" partly a rise in the price level.
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This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.

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ECON 200 Problem Set 9 Solutions Fall 2007 - Economics 200...

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