UNIT 5&6

UNIT 5&6

Apr. 7, 2016

·      Short run Aggregate Supply-In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

·      LRAS- period of time in which wages have become fully responsive to changes in price level.

·      Effects over Short-run:

-In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.

-in the long run, wages will adjust to the price level and previous output levels will adjust accordingly

·      Equilibrium in the Extended Model-The long AS Curve in represented with a vertical line @ full employment level of real GDP.

·      Demand Pull inflation in the AS model

-demand pull- prices increase based on increase in aggregate demand

-in the short run, demand pull will drive up prices, and increase production

-in the long run, increases in aggregate demand will eventually return to previous levels.

·      Cost push & the extended model:

-cost push arises from factors that will increase per unit costs such as increase in the price of key resource.

·      Dilemma for the Government

-in an effort to fight cost-push, the government can react in two different ways.

-action such as spending but the govt could begin an inflationary spiral.

-no action however could lead to recession by keeping production and employment levels declining.

4/8/16

·      Long run Phillip’s curve: natural rate of unemployment is held constant. Because the Long-run Phillips curve exist at the natural rate of unemployment (Un) structural changes in the economy that affect (Un) will also cause the LRPC to shift. Increase in Un will shift to right, Decrease will shift to left.

-long run Phillip’s curve: is no tradeoff between inflation and unemployment.

·      Represented by a vertical line

·      Occurs at natural rate of unemployment.

·      LRPC will only shift if LRAS shifts.

·      NRU (4%-5%) = frictional + Structural + Seasonal unemployment

·      Major LRPC composition is that more worker benefits create higher rates and fewer worker benefits create lower rates.

-supply shocks is caused by rapid an significant recourse cost which causes the LRAS curve to shift.

·      The misery index: a combination of unemployment and inflation in a given year.

·      Single digit misery is good.

4/11/16

·      Inflation- general rise in price level

·      Deflation-general decline in the price level

·      Disinflation-decrease in the rate of inflation over time

·      Stagflation- unemployment and inflation increasing at the same time.