Transcript Sticky Prices

23
An Introduction to Macroeconomics
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Performance and Policy
• Real GDP
• Corrects for price changes
• Nominal GDP
• Uses current prices
• Unemployment
• Inflation
• Increase in overall level of prices
LO1
23-2
Performance and Policy
• Can governments:
• Promote economic growth?
• Reduce severity of recession?
• Is monetary or fiscal policy more
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effective at mitigating recession?
Is there a tradeoff between inflation
and unemployment?
Is anticipated or unanticipated
government policy more effective?
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Performance and Policy
• Output growth
• 2.7% per year 1995-2007
• Unemployment rate
• 4.6% in 2007
• Inflation rate
• 2.7% in 2007
LO2
23-4
Modern Economic Growth
• Standard of living measured by output
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per person
No growth in living standards prior to
Industrial Revolution
Modern economic growth
• Output per person rises
• Not experienced by all countries
23-5
Global Perspective
LO3
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Savings and Investment
• Saving
• Trade-off current for future
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•
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consumption
Investment
• Financial investment
• Economic investment
Banks and financial institutions
23-7
Uncertainty, Expectations, and Shocks
• The future is uncertain
• Expectations affect investment
• Shocks
• What happens is not what you
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expected
Demand shocks
Supply shocks
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Uncertainty, Expectations and Shocks
• Demand shocks and flexible prices
• Price falls if demand is low
• Sales unchanged
• Demand shocks and sticky prices
• Maintain inventory
• Sales change
• Business cycles
LO5
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Demand Shocks
Flexible
Prices
Price
$40,000
$37,000
$35,000
DM
DH
DL
900
Cars per week
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Demand Shocks
Price
Fixed Prices
$37,000
DH
DL
700
900
DM
1150
Cars per week
LO5
23-11
Sticky Prices
Item
Months
Coin-operated laundry machines
46.4
Newspapers
29.9
Haircuts
25.5
Taxi fare
19.7
Veterinary services
14.9
Magazines
11.2
Computer software
5.5
Beer
4.3
Microwaves ovens
3.0
Milk
2.4
Electricity
1.8
Airline tickets
1.0
Gasoline
0.6
Source: Mark Bils and Peter J. Klenow, “Some Evidence on the Importance of Sticky Prices”, Journal of Political
Economy, October 2004, pp 947-985, Used with permission of The University of Chicago Press.
LO5
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Sticky Prices
• Many prices are sticky in the short run
• Consumers prefer stable prices
• Firms want to avoid price wars
• All prices are flexible in the long run
• Firms adjust to unexpected, but
permanent changes in demand
LO5
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Inventory Management
• Computerized inventory tracking
• Unexpected changes in demand are
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easier to observe
Firms make better output and
employment decisions
Less severe business cycles
Before 2007, only two mild
recessions since adoption
Possible explanation
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