Enter aggregate supply - Why may actual output deviate from potential output?

5 important questions on Enter aggregate supply - Why may actual output deviate from potential output?

What does the New Keynesian theory of aggregate supply compromise?

The institutional feature that wages are not negotiated dat by day, but laid down for fixed periods of time

What two assumptions underly the New Keynesian theory of aggregate supply?

That negotiations fix nominal wage rates for lengths of time
Firms employ any number of available workers at the negotiated nominal wage

How does the process of wage setting work within the new keynesian theory of aggregate supply? (include bargaining)

The bargaining is based on the expectations of real wages. The outcome is where the expected labour supply curve cuts the expected labour demand curve. the expected real wage is given a price level expectation translated into a nominal wage, that is written into the contract
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What will happen, looking at the employment, when the expected price levels are lower than expected during the negotiation in the new keynesian theory of aggregate supply?

Prices are lower than expected, so the real wage is higher than expected. Firms reduce demand and the labour force grows, unemployment is the result

Why will firms looking for employees when the price levels turn out higher than expected still be able to find new workers in the new keynesian theory of aggregate supply?

Because of real wage regidities

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