Unit 9: Week 2

Question 1

Aggregate Demand

Answer 1

The sum of the demand for all the goods and services produced in an economy.

Question 2

Demand - Deficient unemployment (Cyclical)

Answer 2

The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle.

Question 3

How firms can remove cyclical unemployment without any govt policy?

Answer 3

• Firms lower wages = lower costs
• The degree of competition facing the firm doesn’t change so it sets a price that restores the profit maximizing markup
• Lower costs = lower price
• Since the demand curve is upward sloping they would sell more increasing output and employment

Question 4

Why doesn’t the equilibrium always reset after wage and price cuts?

Answer 4

• Worker resistance to a reduction in the nominal wage — Its difficult as the actual monetary amount received by workers would decrease = loss of morale and result in conflict. Strikes and worker resistance such as a go slow would disrupt the production process.
• Wage and price cuts might not result in increased sales and employment — firms and households would have to increase their demand by enough to restore aggregate demand. Falling prices economy wide can shift demand to the left as people wait for prices to fall further. + wages are falling so less spending.

Question 5

How the government can increase AD?

Answer 5

1) Central bank making borrowing cheaper - by reducing the interest rate, this provides incentive for people to bring forward their spending, especially on things that are bought with lent money i.e cars, houses.
2) Reduce taxes

Question 6

What increases the shaded area in the gini coefficient?

Answer 6

• higher unemployment - kink shifts right
• fall in real wage - (mark up rises) second kink shifts down
• productivity rises - (markup rises) “”””””””””””””””””””””””””

Question 7

How immigration affects wage setting curve?

Answer 7

• New jobseekers enter the pool of unemployed
• increase the expected duration of a spell of unemployment
• raises the cost of a job loss, increasing employment rent
• but forms would be paying more than necessary to motivate workers
• therefore the lower the wages

Question 8

What is a trade union? And what does it bargaining power depend on?

Answer 8

An organization that can represent the interests of a group of workers in negotiations with employers such as wage, working conditions/hours.
— Ability to withhold labour from the firm

Question 9

How does the wage setting process change with trade unions?

Answer 9

1) Union sets the wage
2) Employer informs workers that insufficient work will result in job termination
3) Employees respond to wage and prospect of dismissal by choosing how hard to work

Question 10

Factors that affect the prince setting curve and their effect

Answer 10

Education and training
- Increased productivity = markup remains the same. Output has risen therefore wages and price must rise.

Wage subsidy
- costs have fallen, the optimal markup that the firm and markup is the same = fall in price and increase in wages.
=upward shift in PSC.

Question 11

Why involuntary unemployment is unavoidable at equilibrium?

Answer 11

• Employers have a conflict of interest: Over how hard employees work.
• Employers cannot write a complete contract with their employees: can’t specify quality and quantity of work.

Question 12

Calculating Real wage on the price setting curve

Answer 12

W/P = output/worker - real profit