week 7 Flashcards
aggregate demand
AD = C + I + G + X – M
income effect equation
+ P ➔ -W/P ➔ -C ➔ -D➔ -Y
p- price index
w- nominal wages
w/p= real wages
Subsitution effect
- international substitution effect (↑Imports // ↓Exports)
- Inter-temporal substitution effect (↑ r→ ↑ S→ future bias)
- real balance effect (↓S value)
aggregate demand curve
shape- bigger income and substitution effect= more elastic
shift - shift when change in one of components (C+I+G+(X-M))
aggregate supply- diminishing returns
Decrease in Marginal price
Increase in Marginal cost
fixed K and other inputs ➔ -Mp ➔ ➔ + Mc [sticky inputs]
growing shortages of certain factors + Production ➔ increasingly + difficult to find inputs (skilled labour, raw materials).
changes in costs on aggregate supply
- general inflation
- wage rates
- exchange rates
- technology
changes in price expectations
equilibrium
excess demand causes price levels to rise
short run aggregate supply curve
increase in aggregate demand causes SRAS output and price level to increase
aggregate demand and supply of labour
ADL- amount of working position offered given the wage rate
ASL- amount of workers willing to accept such positions give the wage rate
demand deficient unemployment
Occurs when there is insufficient aggregate demand in the economy, leading to job losses. It typically happens during economic downturns or recessions, when businesses cut production and lay off workers due to reduced consumer spending and investment.
sticky wages
wages adjust slowly to changes in labour market conditions, particularly when unemployment rises, meaning businesses may be reluctant to cut wages despite facing pressure to reduce costs.
frictional unemployment
problem of imperfect information
Frictional unemployment occurs when workers are temporarily unemployed while transitioning between jobs or entering the workforce. It is a natural and unavoidable form of unemployment.
structural unemployment
-changing pattern of demand
-regional unemployment
-technological unemployment
Structural unemployment occurs when workers’ skills, location, or industry no longer match job market demands, often due to technological advancements, globalization, or long-term shifts in the economy.
classical analysis of goods market
AD rises, so does price. real wage rate falls. gives excess demand for labour. real wage rate will rise back
Keynesian model of labour market
wage and price rigidity
effective demand for labour
negative and positive output gaps
Keynesian analysis of the aggregate goods market
fall in AD. prices are sticky downwards. real wages don’t fall
controversy 1
flexibility of prices and wages
-right; flexible prices and wages
-left; price and wage rigidities
Right (Classical)
Left (Keynes)
controversy 2
flexibility of aggregate supply
how responsive is national output (AS), also unemployment, to change in AD
flexibility of aggregate supply
effect on P and Y (and unemployment)
right- AS determined independently on aggregate demand
left- AS responsive to changes In aggregate demand
Left (keynes)
different aggregate supply curve
Aggregate supply becoming less and less responsive to aggregate demand as full employment is reached
Keynesian analysis of aggregate labour market
fall in AD, wage rates sticky downward. recovery, AD rises back. movement up along supply
controversy 3
role of expectations in the working of the market
right- expectations adjust rapidly to changes in price
left- expectations of prices depend on expectations of output and employment
