B. Medium Run Flashcards
What can the AD relation be summarised as?
Y=Y(m/p, G, T)
What shifts AD?
Any variable, other than P, that shifts either the IS or LM curve
What does the AD-AS model explain?
The business cycle, inflation and unemployment
When can price expectations be wrong?
They can only be wrong in the SR not the MR
What assumption from the IS-LM model is removed when looking at the AD-AS model?
We remove the assumption that prices are fixed
Conditional on price level expectations, when does an equilibrium in the labour market occur?
When real wage implied by wage setting behaviour equals the real wage implied by price setting behaviour
Labour force
Employed workers and those looking for a job
Participation rate
The ratio between labour force and population of working age
Why are wages dependent on the business cycle?
When there is a boom, firms need more workers to produce more output. They have to offer a higher wage to attract more workers so wages are higher in a boom
Types of bargaining
- individual bargaining
- take it or leave it
- collective bargaining
What does bargaining power depend on?
- how costly would it be for firms to replace the worker
- how difficult would it be for the worker to find another job
- market conditions
Why do employers pay wages greater than the reservation wage?
To incentivise workers to put in effort which will increase productivity and reduce turnover costs
What does nominal wage depend on?
Expected price level P^e
Unemployment rate u
A catchall variable z
Why do workers have to make predictions about expected price levels?
They are told their nominal wage for the next 2-3 years (depending on contract) but dont know their real wage unless they work out price levels
What does work hours supplied depend on?
Expected real wage w/P^e
