Supply Curve Flashcards
1
Q
Why do we have a downward sloping ERU?
A
Because there is good evidence that demand shocks do change output.
It means a given real exchange rate and inflation rate can be consistent with multiple different output levels.
2
Q
How do we obtain a downward sloping ERU curve?
A
We now include imports in wage setting decisions. So it’s now W/Pc.
Price setting does not alter, because P is not directly affected by the exchange rate.
3
Q
What shifts the PS curve?
A
The real exchange rate Q. It is now a function of the log exchange rate q.
A depreciation will shift the PS curve down, leading to lower real wages as imports are now higher.
4
Q
How will an appreciation affect real wages?
A
An appreciation will raise will wages as imports are now cheaper.
