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A significant argument for the augmentation has to do with concept of money illusion. Money illusion means that you care about nominal rather than real amounts. Imagine that your salary increases by 20% over one year. Does this mean that you can increase your consumption? The answer is that it relies on the inflation. If inflation is 20%, you can consume as much as you did before. You should actually decrease you consumption if inflation exceeds 20%. We say that you have suffer from money illusion if you believe that you are better off if your salary increases by 20% whereas prices also increase by 20%. A higher nominal salary may create the ‘illusion' that you are richer.
If employees suffer from money illusion they will only care about nominal wage increases, expected inflation won't matter and there is no reason for traditional Phillips curve not to hold. If, though, they don't suffer from money illusion, ?wshould depend on both U and Πe and augmented Phillips curve is more realistic.
If income falls below its potential and the income tax rate is reduced, this will: A. raise the passive deficit but reduce the structural deficit. B. raise both the passive and str
Factors Responsible for changes in Aggregate Supply We know that changes in input costs such as wages, oil and other input prices will cause changes in aggregate supply. Most
c=100+0.8yd
Summary of the cross model The below list summarizes the cross model and associates it to classical model: Labor Market: Real wages W/P is exogenous in cross model
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At first, it may seem obvious that consumption will rely on Y. If GDP is doubled in real terms over a number of years, government consumption, private consumption and investment wi
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what are the limitation of economies scales
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