Task 2 (20 marks, approx. 400 words) Tables 1 and Figure 1 below are drawn from the article by Andersen E., Jaimovich N., Simester D., (2015), "Price Stickiness: Empirical Evidence of

the Menu Cost Channel", The Review of Economics and Statistics, 97, 4, 813-826 (the article is available on Moodle). The aim of the research is to investigate whether prices are 'sticky' and the circumstances and channels through which prices stickiness emerges. You are asked to summarise the research and its main findings by answering the following questions. 1) What do the researchers mean when they ask "Why does monetary policy have real effects on the economy"? 2) What type of menu cost do the researchers specifically test in their research? Carefully explain. 3) Use the evidence in Table 1 and Figure 1. to discuss the research main findings and its implications for macroeconomic policy. (6 marks) 4) In light of the research findings, what phase of the business cycle is likely to be the most problematic from a macroeconomic point of view and why? Carefully explain. (4 marks) Table 1.- Frequency of cost and price changes TABLE 1.-FREQUENCY OF COST AND PRICE CHANGES Cost Increases 70.6% 0.9% 28.5% 11,368 (5 marks) (5 marks) Cost Decreases 5.7% 9.2% 85.2% 4,194 Price increased Price decreased No price change Sample size The table reports the percentage of times that the retail price changed when the cost changed./nFigure 1.- Probability of price increase following a cost increase FIGURE 1.--PROBABILITY PRICES INCREASE FOLLOWING A COST INCREASE A. Unweighted Probability of a Price Increase Probability of a Price Increase 80% 70% 60% 50% 40% 80% 70% 60% 50% 40% 0 0 71.2 % 71.6 % 2 74.8 % 73.8% 2 4 66.8% Number of SKUS B. Weighted by Prior Revenue 69.8% 10 Number of SKUs 10 59.8% 12 59.4% 12 14 14