Question

wContent/1703730/View?u=159815 QUESTION 2: On the derivation of the New-Classical PSSF (Price Surprise Supply Function) The Production Function: Y=G+(1-a) L Labour Demand: W-P-A-aL Labour Supply: W - pe=B+bL BACKGROUND: This model assumes perfectly flexible wages. The key here is the assumption of asymmetric information requirements. The assumption is that firms need only know their own product price in order to evaluate their own labour demand. Since each firm knows its own product price, the aggregate demand for labour depends on actual prices. On the other hand, workers need to know the aggregate price level (CPI) in order to evaluate the purchasing power of any nominal wage offer. Unfortunately, the aggregate price level is not known at any instant in time, but must be expected. Hence, labour supply depends on expected prices. This assumption generates a similar aggregate supply function to that in question 1. EXERCISE: (a) Assume P-P and hence solve for L. (b) Using equations (2b), (3) and L', derive an expression for L, such that L-L depends on P-P (c) Use equation (1), the production function, to replace L. and L' with Y and Y! This is the PSSE. (a) What is the expression for the slope of the PSSF2 Demonstrate that it is greater than the slope of the SRAS. (e) Ifb-5 (and 'a' continues to equal 0.25), what is the numerical value for the slope of the PSSF? MacBook Air

Answer 1

.Y= G + (1-a) L -P=A-aL w-pe BtbL P = pe - - - W-P = wipe W-l=W-P A-al = Btbl A-B=bra) L * = A-B ath @ Slope = (1-2) x 1 a to auto b=05 a=0. 25 -P=A-AL la-pe BtbL * =A-B atb w-p = A -aCA-B) atb wope = Btb/A-B) (a +b/ Slope = (1-0) ã tb = 1-0.25 5 +0.25 0.75 5.25 -0.14 wape-(W-P) = Btb L - (A-AL) pope = (B-A) + (a + b) Pepe - + Ip-pe=(L-L* (ath Atb 7 G +(1-a) (A-B a to 4 = G+ (1-2) L. y* G* +-a) La Yoyo - G - G+ (1-aXL - PSSF Yoy*= G-G* + (1-a) Caet (P-pl) la+b)