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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.
Consider an economy in which George and Harriet consume only ale and bread. George's utility function is UG = aG(bG- 1) where aG and bG are his consumption of ale and bread. Harrie
Shows the productivity for the countries Pin and Pang. Machines Bread Pin 4 or 3 Pang 3 or 8 1) If the working population of Pin and Pang are both 6 million, divide
Determination of all endogenous variables We can explain how all the endogenous variables are determined in below figure: Figure: The Keynesian model with the Phillips c
(a) Use this information to set up a diagram showing the firm''s total revenue and total cost schedules. In this diagram, show the points at which the firm is maximizing profits.
You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -3,
factors that causes the shifts in balance of payments
a) Use the arc-approximation formula to calculate the price-elasticity of demand coefficient of a firm's product demand between the (quantity, price) points of (100, $20) and (300,
What is Inherent Limitation?
What isn''t a component of the M1 money supply?
How has the Internet revolution affected the workings of businesses, consumers, and government in a free market economy? Specifically, how has Internet affected businesses' ability
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