Class Notes (838,699)
Canada (511,051)
Brock University (12,137)
Economics (200)
ECON 1P92 (65)
Lecture

Chapter 24.docx

6 Pages
174 Views
Unlock Document

Department
Economics
Course
ECON 1P92
Professor
Marilyn Cottrell
Semester
Winter

Description
Chapter 24: Output and Prices in the Long Run The Long Run GDP and prices adjust to reach equilibrium in the long run  Assume technology constant  Factor prices now change  Begin with long run equilibrium- GDP at potential: Potential GDP or output  All productive resources (factors of production) used at their normal rates of utilization No Output Gap  Vertical line at equilibrium is Y*  No output gap  GDP is at potential (Y*)  Price level is Po  GDP at Y* When Y=Y*  Unemployment Rate equals the natural rate of unemployment U*  U* includes both structural and frictional unemployment Output Gaps  If actual output is below potential, have recessionary output gap Y less than Y*  If actual output is above potential, have an inflationary output gap Y greater than Y* Inflationary Output gap When Y greater than Y*:  Demand for labour (and other factor services) is high Boom leads to:  High profits for firms  High demand for labour  Wages and production costs rise  Higher production costs shift AS leftward  Prices rise  Output declines- equilibrium falls to Y* A recessionary output gap When Y less than Y*:  Demand for labour (and other factor services) is low Slump leads to:  Low profits for firms  Low demand for labour  Wages and unit production costs fall  AS curve shifts rightward  Output rises  Prices fall  Equilibrium GDP rises to Y* Speed of factor-price adjustment  Factor-prices adjust at different speeds  Booms cause wages to rise rapidly  Slumps cause wages to fall slowly In long run, potential output is an anchor:  Shock raises short run GDP above or below Y*  Wages and other factor prices adjust  GDP returns to Y* Aggregate Demand and Supply Shocks Long Run-Positive AD Shock Self-adjustment mechanism  Return economy to potential GDP  i.e., it removes unemployment, if wage rates fall ``Wage rates `sticky in a downwards direction`` (Keynes)  if wages fall slowly, or not at all  supply curve may not shift rightward  U may not return to U* (natural rate of unemployment) at Y* (full employment) until demand rises After AD or AS shock  Wage flexibility determines speed economy returns to Y* Flexible wages:  Rapidly during inflationary output gaps  Provide an automatic adjustment mechanism  Pushes economy back to potential Sticky or rigid wages:  Economy is adjustment mechanism is sluggish  Output gaps tend to persist Economic Shocks and Business Cycles  AD and AS subject to continual random shocks  Automatic adjustment mechanism converts shocks into cyclical fluctuations in real GDP  Lags cause changes in output to be extended over long periods of time Long-Run Equilibrium  Excess demand or supply of labour (and other factors) will be eliminated  Full employment of factors  Output at potential level, Y*  Potential GDP is vertical at Y*  There is no relationship in long run between price level and output produced  Unemployment is U*  Firms’ output same, regardless of price level Potential GDP may increase over time:  Change in productivity or,  Change in technology  Economics growth  Y* s
More Less

Related notes for ECON 1P92

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit