Let5 -...

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Let's summarize the chain of events that leads from an increase in the price level to an  increase in output in the sticky-wage model. When the price level rises, real wages fall.  When real wages fall, labor becomes cheaper. When labor becomes cheaper, firms hire  more labor. When firms hire more labor, output increases.  Worker-Misperception Model  The worker-misperception model of the upward sloping short- run aggregate supply  curve is again based on the labor market. This time, unlike in the  sticky-wage model wages are free to move as the economy changes. The amount of work that an  employee is willing to supply is based on the expected real wage. That is, workers know  how many dollars they are being paid, the nominal wage, but workers can only guess at  how much goods and services they can purchase with this wage, the real wage. In  general, the higher the real wage, the more work that workers are willing to supply. 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Let5 -...

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