-
Wage setting relation: Increasing real wage
Decreases unemployment rate
-
-
Exogenous changes in labour market diagram
+unemployment benefits, +WS
less stringent antitrust laws, +markup, -PS
+oil price, +markup, -PS
-
AS formula
 - *starts from the labour market; Pe is exogenous here
-
AS: increase in output leads to an increase in the price level. This is the result of
+Y, +employment, -unemployment rate, +Wage, +Price Level
-
An increase in the expected price level leads, one for one, to an increase in the actual price level. This effect works through wages
+expected price level, +wage, +price level
-
If output is equal to the natural level of output,
Price is equal to expected price level
-
The AS curve does not represent labour market eqm, ie
Only one point on AS which stands for Y=Yn and P=Pe
-
AD: An increase in price level leads to an decrease in output. This is the result of
+Price level, -real money supply(M/P), +interest rate, -investment demand, -Y
-
AD formula
*not exhaustive
-
Eqm point in any SR and MR
SR: intersection btw AD and AS(eqm in financial and goods market)
MR: intersection btw Yn(or Pe) and AS
-
-
Monetary expansion on LM&AS from SR to MR(netrality of money)
- SR: +M, +LM, -i, +Y
- MR: +P(proportional), -LM&AS, -Y(back to Yn) & +i(back to original level)
-
DiagramMonetary expansion on LM&AS from SR to MR
-
Fiscal contraction on LM&IS&AD&AS from SR to MR
SR: -AD&IS, -Y & -P & -i; +M, +LM, -i, +Y(by smaller extent)
MR: +AS&LM, +Y(back to Yn), -P, -i
-
Diagram: Fiscal contraction on LM&IS&AD&AS from SR to MR
-
Implication of fiscal contraction in MR
Yn=C+I+G, ~Yn, ~C, -G, +I
*because –i
-
Increase in oil price on AS from SR to MR
SR: +price level at any Y, -AS(goes through new Yn), +P & -Y
MR: -AS, +P, & -Y(to new Yn)
-
Finding the not-yet-revised expected price level after supply shock(AS’)
Expected price level of AS, which intersect with AS’
-
Why the effect of oil price increase is much smaller now
-Worker’s bargaining power, -z, +AS(offset some –AS)
-
How to determine whether the shock affects the natural rate of unemployment.
- If the shock is to a variable in the IS-LM model>not affect
- If the shock is to a variable in the AS curve (other than the expected price level)>affect
-
price adjustment assumption
- nominal wages do not adjust to actual prices but to expected ones
- the expected price level does not change in the SR
- prices can change in SR
-
how is interest rate in medium run determined
intersection btw IS curve and Yn
-
in MR, consumption increase if the shock involves
reducing tax
-
the natural level of output is where
the real wage chosen in wage setting is equal to the real wage implied by price setting.
-
if natural level if unemployment increases
-
monetary policy to offset supply shock
- increase M: offset some drop in output in SR, at the expense of higher price in MR
- decrease M: Y in SR further declines, but in MR reaches new Yn more quickly
|
|
