|11. Sensitivity of the Results to the Specification of the Price Equation|
|Prices in the model respond only modestly to changes in
the unemployment rate. This seems to
be what the data are telling us, but many may feel that prices are likely
to respond more
than the model indicates. It is easy to change the model to make it more
price sensitive to unemployment changes.
This is done by making the coefficient of the unemployment rate
in equation 10 larger in absolute value. This is what Experiment 11.1
Experiment 11.1: Experiment 5.1 with a more Unemployment Sensitive Price Equation
The sensitivity of prices to changes in demand is one of the key questions in macroeconomics, and experiments like 11.1 help to examine it.