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High unemployment rate may reflect
- Stagnant unemployment pool
- Active labor market with many separation and hires
Avg duration of unemployment
1/(ratio of people leaving unemployment to unemployment)
Non-employment rate formula
Implications of fluctuation of unemployment rate
- Chances of an unemployed finds a job decreases(longer unemployment)
- Chances of laidoffs are higher
Assumption in the medium run
Expected price level is equal to the actual price level
- Price level expectation(+)
- Unemployment rate u(-)
- unemployment benefits(+)
- minimum wage(+)
the price level increases leads to an … in the nominal wage
If all markets were perfectly competitive, markup miu = …., P = ….
The natural rate of unemployment is …
the unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting.
less stringent enforcement of antitrust legislation,let firms increase their prices given the wage(higher markup) , leads to a ...in the real wage
An increase in output leads to an increase in the price level. This is the result of four steps:
An increase in output leads to an increase in employment.
The increase in employment leads to a decrease in unemployment and therefore to a decrease in the unemployment rate
The lower unemployment rate leads to an increase in the nominal wage.
The increase in the nominal wage leads to an increase in the prices set by firms and therefore to an increase in the 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
- If wage setters expect the price level to be higher, they set a higher nominal wage.
- The increase in the nominal wage leads to an increase in costs, which leads to an increase in the prices set by firms and a higher price level.
aggregate supply relation is derived from
wage determination and price determination in the labor market
aggregate demand relation is derived from
the equilibrium conditions in the goods and financial markets
In the medium run, output eventually returns to …The adjustment works through changes in ….
- the natural level of output.
- the price level.
In the AS- AD model in the short run, …price is fixed and …price can move
Consider the ADAS diagram, A monetary expansion leads to…., which is proportional to…
- An increase in prices;
- the increase in the nominal money stock
The impact of a monetary expansion: the horizontal shift in LM curve is partially offset by….; however, in short run it is smaller than the increase in money supply
Increase in price level
Any change in exogenous variable in AD relation shift the curve; How large is the effect depends on the slope of AS. The …the AS, the larger increase in Y and the smaller increase in P
In the short run, a monetary expansion leads to an …in output, … in the interest rate, and an … in the price level.
Increase, decrease, increase
The Neutrality of Money means that…
In medium run, the increase in nominal money has no effect on output or on the interest rate. It is reflected entirely in a proportional increase in the price level.
In medium run, the composition of output is different than it was before deficit reduction. Income(natural level)and taxes remain unchanged, thus, … is the same as before. … is lower than before (due to the budget deficit reduction); therefore, … must be higher than before deficit reduction by the exact amount
Consumption; government spending; investment
In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on…,and, subsequently,…
The money market; investment
The effects of an increase in the price of oil on output and the price level are much smaller than they used to be
decrease in works’ bargaining power, catchall variable z↓; AS shifts right; offset some effects of left shift in the AS
what factors shift left the AS curve
increase in markup
increase in unemployment benefit(catchall z)
increase in expected price level
When the economy is operating at a point where output is greater than the natural level of output,the unemployment rate is …than the natural unemployment rate
In the short run, a reduction in the price of oil will cause interest rate to …
In the ISLM model, price is allowed/not allowed to change; in ADAS model, prices are now allowed/not allowed to change in the short run but…
Not allowed; allowed; may not equal the expected price level in the short run.
the interest rate is determined by the intersection of…hence conditional on the natural level of output, the interest rate is determined by
the IS curve and the natural level of output; fiscal policy.
To derive AD, change….; to derive As, change…
P to derive the corresponding Y; Y to derive the corresponding P
The natural level of output can be determined by looking solely at the …relation.
If the shock is to a variable in the AS curve (other than the…), it will affect the natural rate of unemployment and thus the natural level of output
expected price level
what would be the effect of expansionary monetary policy if it was used after adverse AS shock?
Buffer some of the output fall in short run at the expense of higher price level
what would be the effect of contractionary monetary policy if it was used after adverse AS shock?
Additional decline in short run output, but moves the economy to new Yn more quickly with a lower medium run price level
if the natural level of output increases, what monetary policy should be adopted to move it faster to new natural level of output?
Why are there unemployment
- If unemployment rate approaches zero, real wage would grow withoutbound
- At any positive rate of unemployment, there are someconstraint on worker’s bargaining power, real wage cannot grow without bound
suppose an econ originally starts from S-S. Increase in dep'n rate decreases...
k, y and c
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