Cyclical fluctuations, Microeconomics

Assignment Help:

Cyclical Fluctuations:

Consider a situation where the value of money above trend indicates an unexpectedly high level of money in the recent past. The model predicts that this excess above trend would induce a higher level of output, work effort, and investment, all relative to trend. That is to say, money, employment, and investment would vary procyclically. These predictions correspond to the data. On the other hand, some predictions generated by the model fit the data less tightly. A monetary shock would, according to the theory, lead to an increase in the general price level and a fall in the expected interest rate. The evidence seems to not to support the proposition that the rise in the price level is procyclical and the expected real interest rate is countercyclical. Since the production function is assumed not to change, and the capital stock is given in the short run,  the increase in the employment of labour implies that the marginal and average products of labour fall. The theory predicts that labour productivity and the real wage rate would be low when the volume of output and labour input are high. That is to say,  labour productivity and the real wage rate vary counter-cyclically. This proposition, again, is not consistent with the data.  The conclusion is that there might be limitations to a model constructed to explain business fluctuations driven entirely by monetary surprises. Incorporating shifts in the production function and assigning monetary shocks a secondary role might be a superior strategy.          


Related Discussions:- Cyclical fluctuations

Kolbey:s reaction, why can methane not be prepared by this reaction

why can methane not be prepared by this reaction

Returns to scale in carpet industry, Returns to Scale in Carpet Industry ...

Returns to Scale in Carpet Industry *  The carpet industry has grown from the small industry to large industry with some large firms. *  Question - Can the growth be illu

The market supply of labour, graphical illustration describing the influenc...

graphical illustration describing the influence of an increase in immigrants on the market supply of labour

Monopsony, advantages and disadvantages

advantages and disadvantages

Time serie, uses of time series in indian economy

uses of time series in indian economy

Rational producer, would a rational producer be concerned with the average ...

would a rational producer be concerned with the average or marginal product of an input in deciding whether or not to hire the inputs?

Determinants of social demand for education, Determinants of Social Demand ...

Determinants of Social Demand for Education Certain levels of education like the secondary school and graduate level are considered as having productive value and are attribut

Describe the change in returns to scale & factor proportion, Before explain...

Before explaining returns to scale it will be instructive to make clear the distinction between change in the scale and changes in factor proportions. The difference between the ch

Ridge line., what is aridge line and significance in economics.

what is aridge line and significance in economics.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd