dse

[SHIKHA]

thank u so much sir..
i have one more doubt..i have posted this ques earlier but no one responded...i have been searching for this answer for a while...plz kindly help!

DSE 2009
Ques: Under nominal wage rigidity , the short run aggregate supply schedule will be__________

answer given is upward sloping...plz explain how increase in prices will affect labor demand and labor supply in (W-N) space???

please reply ....

[Amit Goyal]

Generally rigid nominal wage is explained as a result of labor unions trying to set the nominal wage higher than what market, if left freely, would result in. At this level of wage, the supply of labor is perfectly elastic (at least locally). Where as demand for labor is downward sloping. Now rise in price would result in shift in labor demand upwards and hence would lead to rise in employment and output. Thus higher price is associated with higher level of output.

[Monika]

sir, but i= r + expected inflation and this increase in expected inflation will cause increase in nomila interest rate. so wont the lm shift up??

[Amit Goyal]

There is a difference between changing the prices and changing the rate of inflation. Rate of inflation is affected by changing the rate at which price changes and not by the change in the price level.

[pbansal]

sir i have read that  increase in expected inflation shifts the IS curve to the right ,could u tell the reason behind this

[maahi]

increase in expected inflation implies inflation increases as it is a self fulfilling prophecy that means taht d prices for the goods sold by firms rise which shifts d labor demanded by firms as dey increase production . lets suppose that labor supply curve is not responsive to changes in prices  and therefore at d same wage employment increases which increases the output produced and hence IS shifts to d right .