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

Moving average methods, Moving Average Methods: Under this methods the movi...

Moving Average Methods: Under this methods the moving average to the sales of the past years is computed. The computed moving average is taken as forecast for the next year or peri

How can we calculate the inflation rate, How can we calculate the Inflation...

How can we calculate the Inflation rate Inflation:   The rise in general prices and the decrease in value of money. Inflation is a sustained increase in the general price level

Marginal utility., marginal utility is applied on money or not

marginal utility is applied on money or not

Price determination explain briefly about it by then, about the price deter...

about the price determination with the held of diagramatic explanation numerical explanation related to the concept

Explain the concept of opportunity cost, The concept of opportunity cost oc...

The concept of opportunity cost occupies a very important place in modern economic analysis. The opportunity cost of any good is the next best alternative goods that are sacrificed

Monopoly, What are the causes of emergence of monopoly?

What are the causes of emergence of monopoly?

Revenue and profit maximization, Revenue and Profit Maximization: When...

Revenue and Profit Maximization: Whenever a good is produced, the individual firm which has produced incurs costs which are are referred to as private costs and the society in

Case study of growth of regional financial institutions, Case Study - EUROP...

Case Study - EUROPE   Let us now see how events unfolded over the decades in Europe that led to monetary unification in terms of a single currency and single central bank. At

Equilibrium level of economic output, Provide an economic explanation of wh...

Provide an economic explanation of what you have shown in your diagram above.  Iceland was a small open economy with perfect capital mobility. Consequently, the equilibrium domesti

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