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Unformatted text preview: MPL(j)). (iv) Firms do not respond immediately to a demand shock because there are adjustment costs that are first required (manager/owners must meet to decide on new pricing strategy and then physically change the price at the store and in advertising) 2. Effect of a Money Shock (i) an increase in the money supply causes an increase in dollar spending as before (ii) Now firms do not change prices in response. Will they change production? Yes, remember even if P (j) is fixed it is above MC (j), so profit can be earned by expanding production even if MC (j) is increasing in output. (iii) Since all firms will be expanding employment, there will be an increased demand for labor and a higher real wage rate. 3. Comparison to Other Theories Barro Ch.16 PP1...
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.
- Spring '08