Question

Consider the overlapping wage contract model. Select one:

a. If agents are relatively forward-looking there will be low persistence in output.
b. If agents are relatively backward-looking there will be low persistence in output.
c. If agents are relatively forward-looking there will be high persistence in output.
d. If agents are equally forward and backward-looking there will be no persistence in output.

Answer 1

In the overlapping wage contract model, the level of persistence in output is influenced by how forward or backward-looking the agents are. If agents are relatively forward-looking, there will be high persistence in output. Conversely, if agents are relatively backward-looking, there will be low persistence in output.

Step-by-step explanation:

In the overlapping wage contract model, the level of persistence in output is influenced by how forward or backward-looking the agents are. If agents are relatively forward-looking, there will be high persistence in output. This means that the current level of output will have a strong influence on future levels of output. On the other hand, if agents are relatively backward-looking, there will be low persistence in output. In this case, the current level of output will have less impact on future levels of output.

For example, if agents are forward-looking, they are more likely to base their wage demands and employment decisions on their expectations of future economic conditions. This can lead to a situation where changes in output today have a lasting impact on future levels of output. Conversely, if agents are backward-looking, they are more likely to base their decisions on past economic conditions, making output less persistent.