# ECON lec10-14

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 Author: yhliuaa ID: 244823 Filename: ECON lec10-14 Updated: 2013-11-03 23:07:37 Tags: ECON lec10 14 Folders: Description: ECON lec10-14 Show Answers:

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1. Wage setting relation: Increasing real wage

Decreases unemployment rate

2. Labour market diagram
3. Exogenous changes in labour market diagram
+unemployment benefits, +WS

less stringent antitrust laws, +markup, -PS

+oil price, +markup, -PS
4. AS formula
• *starts from the labour market; Pe is exogenous here
5. AS: increase in output leads to an increase in the price level. This is the result of
+Y, +employment, -unemployment rate, +Wage, +Price Level
6. 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

7. If output is equal to the natural level of output,

Price is equal to expected price level

8. The AS curve does not represent labour market eqm, ie

Only one point on AS which stands for Y=Yn and P=Pe

9. 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

*not exhaustive
11. 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
12. If Y>Yn, in MR

Pe increases

13. 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)

14. DiagramMonetary expansion on LM&AS from SR to MR
15. 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
16. Diagram: Fiscal contraction on LM&IS&AD&AS from SR to MR
17. Implication of fiscal contraction in MR
Yn=C+I+G, ~Yn, ~C, -G, +I

*because –i
18. 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)
19. Finding the not-yet-revised expected price level after supply shock(AS’)

Expected price level of AS, which intersect with AS’

20. Why the effect of oil price increase is much smaller now
-Worker’s bargaining power, -z, +AS(offset some –AS)
21. 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
22. 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
23. how is interest rate in medium run determined
intersection btw IS curve and Yn
24. in MR, consumption increase if the shock involves
reducing tax
25. the natural level of output is where
the real wage chosen in wage setting is equal to the real wage implied by price setting.
26. if natural level if unemployment increases
• Yn decreases
• un=1-Yn/L
27. 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

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