Question

According to the misperceptions theory, what effect does a reduction in the actual price level have on the amount of output supplied by producers? Explain using labour market analysis. b) Will there be any relationship between inflation and unemployment either in the short run or in the long run in the context of part (a)? What factors account for the different opinions of economists about this relationship?

Answer 1

Answer:

Sticky wage idea is connected to misperception theory. When the price drops, the supplier's expectations aren't met. There will not be full employment of output due to the predicted reduction in price level.

b)The long-run Phillips curve is a vertical line at the natural rate of unemployment, but the short-run Phillips curve is roughly L-shaped. The inverse relationship shown by the short-run Phillips curve only exists in the short-run; there is no trade-off between inflation and unemployment in the long run.