ECON lec10-14

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  1. Wage setting relation: Increasing real wage

    Decreases unemployment rate

  2. Labour market diagram
    Image Upload 1
  3. Exogenous changes in labour market diagram
    +unemployment benefits, +WS

    less stringent antitrust laws, +markup, -PS

    +oil price, +markup, -PS
  4. AS formula
    • Image Upload 2
    • *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

  10. AD formula
    Image Upload 3

    *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
    • Image Upload 4
    • Image Upload 5
  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
    Image Upload 6Image Upload 7
  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
Card Set
ECON lec10-14
ECON lec10-14
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