Worth: Mankiw Economics 5e 352 PART IV Business Cycle Theory: The Economy in the Short Run figure 13-2 Percentage hange in real 4 1972留 1998■ ■1965 996■ a1970 1984m 1982 1993■ 1990■ 1975■ 1979■ 1974■ Percentage change in real GDP The Cyclical Behavior of the Real Wage This scatterplot shows the percentage change in ith the sticky-wage mode, age is somewhat procyclical. This observation is inconsistent direction That is. the real wa Source: U.S. Department of Commerce and U.S. Department of Labor. The Imperfect-Information Model curve is called the imperfect-information model. Unlike the sticky-wage model, this model assumes that markets clear--that is, all wages and prices are free to adjust to balance supply and demand. In this model, the short-run and long-run aggregate supply curves differ because of temporary misperceptions about prices The imperfect-information model assumes that each supplier in the economy produces a single good and consumes many goods. Because the number of goods is so large, suppliers cannot observe all prices at all times. They monitor closely the prices of what they produce but less closely the prices of all the goods they consume. Because of imperfect information, they sometimes confuse changes in he overall level of prices with changes in relative prices. This confusion influ- ences decisions about how much to supply, and it leads to a positive relationship between the price level and output in the short run Consider the decision facing a single supplier- a wheat farmer, for instance. Because the farmer earns income from selling wheat and uses this income to buy pods and services, the amount of wheat she chooses to produce depends on the User JoENA: Job EFFo1429: 6264_ch13: Pg 352: 27759#/eps at 100sl Mon,Feb18,200212:56User JOEWA:Job EFF01429:6264_ch13:Pg 352:27759#/eps at 100% *27759* Mon, Feb 18, 2002 12:56 AM The Imperfect-Information Model The second explanation for the upward slope of the short-run aggregate supply curve is called the imperfect-information model. Unlike the sticky-wage model, this model assumes that markets clear—that is, all wages and prices are free to adjust to balance supply and demand. In this model, the short-run and long-run aggregate supply curves differ because of temporary misperceptions about prices. The imperfect-information model assumes that each supplier in the economy produces a single good and consumes many goods. Because the number of goods is so large, suppliers cannot observe all prices at all times.They monitor closely the prices of what they produce but less closely the prices of all the goods they consume. Because of imperfect information, they sometimes confuse changes in the overall level of prices with changes in relative prices.This confusion influ￾ences decisions about how much to supply, and it leads to a positive relationship between the price level and output in the short run. Consider the decision facing a single supplier—a wheat farmer, for instance. Because the farmer earns income from selling wheat and uses this income to buy goods and services, the amount of wheat she chooses to produce depends on the 352 | PART IV Business Cycle Theory: The Economy in the Short Run figure 13-2 Percentage change in real wage Percentage change in real GDP 1982 1975 1993 1992 1960 1996 1999 1997 1998 1979 1970 1980 1991 1974 1990 1984 2000 1972 1965 3 2 10 1 2 3 7 8 4 5 6 4 3 2 1 0 1 2 3 4 5 The Cyclical Behavior of the Real Wage This scatterplot shows the percentage change in real GDP and the percentage change in the real wage (measured here as real private hourly earnings). As output fluctuates, the real wage typically moves in the same direction. That is, the real wage is somewhat procyclical. This observation is inconsistent with the sticky-wage model. Source: U.S. Department of Commerce and U.S. Department of Labor