Procrustean Art of Backtracking: “AS Curve: the Sticky-Price Model”
The following is copied from somewhere else and then slightly modified. Under the assumption that some firms hold their prices sticky, certain macroeconomists including the influential Harvard economist Gregory Mankiw ( Macroeconomics , 8 th ed. § 14-1) illustrate the AS curve to be P= s∙EP+ (1– s)∙[P+ a∙(Y– Y*)] , where EP is the planned price level (“sticky prices”), “ s ” the fraction of firms stuck to EP , Y* the natural level of output, and “ a ” is a coefficient. Incidentally, the coefficient has a very complicated metric but nevertheless has little meaning as a link between indexes. The equation has many flaws in addition to dimension aberration and being a relationship of indexes of little meaning on their own. First among other additional defects, firms cannot “set” their prices without affecting their outputs. In the ...