MGEA06H3 Study Guide - Final Guide: Fiat Cr.42, 1, Sub Sub

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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Topic 7: part a the as-ad model in the long run. The effect of a change in wages on as and ad curves. Inflationary or deflationary gap can be eliminated by change in (nominal) wages in the long run: a rise or fall in (nominal) wages will have no effect on ad curve. The (natural) adjustment mechanism from the short run to the long run. Note: since the natural adjustment mechanism for the as curve always go back to yfe, this indicate that the long-run as curve is vertical. The position of ad curve is what determines the long-run price level. Does the adjustment mechanism actually work: case 1: for deflationary gap (y* < yfe, wages are sticky downwards because: (meaning it takes a long time for the lr to arrive) Workers are very reluctant to lower their wages, even if they are out of work people are not happy to give up what they think they have earned.

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