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Barro+PP-Ch.15

# Barro+PP-Ch.15 - The Price-Misperceptions Model A Model...

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Macroeconomics - Barro Chapter 15 1 The Price-Misperceptions Model A Model with Non-Neutral Effects of Money The price level, P , the relevant variable is the price of a market basket of goods. These goods will be purchased from many locations at various times. Therefore, a worker will typically lack good current information about some of these prices. denote by P e the price that a worker expects to pay for a market basket of goods.

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Macroeconomics - Barro Chapter 15 2 The Price-Misperceptions Model A Model with Non-Neutral Effects of Money the effects from an increase in the nominal quantity of money what happens when workers do not understand that an increase in the nominal wage rate, w , stems from a monetary expansion that inflates all nominal values, including the price level, P .
Macroeconomics - Barro Chapter 15 3 The Price-Misperceptions Model A Model with Non-Neutral Effects of Money Each worker may think instead that the rise in w constitutes an increase in his or her real wage rate, w/P . The perceived real wage rate is the ratio of w to the expected price level, P e . This ratio, w/P e , rises if the expected price level, P e , increases proportionately by less than w . If w/P e increases, the worker increases the quantity of labor supplied, Ls .

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Macroeconomics - Barro Chapter 15 4 The Price-Misperceptions Model A Model with Non-Neutral Effects of Money w / P e = ( w / P ) · ( P / P e )
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Barro+PP-Ch.15 - The Price-Misperceptions Model A Model...

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