ECON 1P92 Lecture Notes - Lecture 13: Output Gap, Potential Output, Shortage
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ECON 1P92 Full Course Notes
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Econ 1p92 - lecture 13 notes: ch 24: from the short-run to the long-run-the adjustment of. Gdp and prices adjust to reach equilibrium in the long run. Begin with long run equilibrium gdp at potential: All productive resources (factors of production) used at their normal rates of utilization. Unemployment rate equals the natural rate of unemployment [ u* ] U* includes both structural and frictional unemployment. If actual output is below potential, have recessionary output gap [ y < y* ] If actual output is above potential, have inflationary output gap [ y > y* ] Demand for labour (and other factor services) is high. Demand for labour (and other factor services) is low. In long run, potential output is an anchor: Shock raises short run gdp above or below y* Returns economy to potential gdp i. e. , it removes unemployment, if wage rates fall. Wage rates sticky in a downwards direction ( keynes)