22Chp22-Econ3310

22Chp22-Econ3310 - Aggregate Supply Equilibrium Analysis...

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Unformatted text preview: Aggregate Supply Equilibrium Analysis Even though sticky prices are in no one’s interest, prices can be sticky simply because people expect them to be If firm A expects firm B to cut prices, it may be optimal for firm A to cut prices as well: no recession. If firm A expects firm B to keep prices unchanged, it may be optimal for firm A to keep prices unchanged: recession. 2. Staggered prices: price setting is not synchronized, firms that raise prices first limit the increase to avoid losing market share 3. Coordination failure: each firm’s decision influences the set of outcomes available to the other firm (externalities) 1. Menu Costs : adjusting prices is costly for firms Why are prices sticky? Reasons for price stickiness Aggregate Demand ...
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