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Unformatted text preview: Recall that producers are willing to provide more labor when the wage is high. That is, they will work harder when they are getting paid more for their work. Also recall that producers cannot differentiate between relative changes in the price level and absolute changes in the price level. Thus, when a producer sees a change in the price level, she will likely believe that it is a relative change in the price level, even if it is an absolute change in the price level. Because of this, the producer will work more and produce more output when the price level rises. Thus, an increase in the price level causes output to rise. Let's summarize the chain of events that leads from an increase in the price level to an increase in output in the imperfect-information model. When the overall price level rises, producers mistake it for a relative increase in the price level. When the relative price producers mistake it for a relative increase in the price level....
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- Fall '11