Suppose that labor demand and labor supply are given by: L=100-(W/P) L=(W/Pe)-50 where P=price level and...

 

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Suppose that labor demand and labor supply are given by: L=100-(W/P) L=(W/Pe)-50 where P=price level and Pe=expected/imagined price level a) Explain the assumptions of the classical and Keynesian theories regarding the relationship between P and Pe? b) Assume now that P=Pe=1. Draw the labor demand and supply curves whereby the nominal wage W is on the vertical axis. Find the equilibrium W and L. c) contd. from b). What would happen from the classical viewpoint when P increases to P=2? Show graphically and numerically and explain in words. Suppose that labor demand and labor supply are given by: L=100-(W/P) L=(W/Pe)-50 where P=price level and Pe=expected/imagined price level a) Explain the assumptions of the classical and Keynesian theories regarding the relationship between P and Pe? b) Assume now that P=Pe=1. Draw the labor demand and supply curves whereby the nominal wage W is on the vertical axis. Find the equilibrium W and L. c) contd. from b). What would happen from the classical viewpoint when P increases to P=2? Show graphically and numerically and explain in words.

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a In the classical theory it is assumed that P Pe always Prices adjust quickly so that expe... View the full answer