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Lecture 9

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McGill University
Economics (Arts)
ECON 460
William Watson

Lecture 9 Thursday, October 4, 2012 Chapter 20  Have to go from effective demand to employment  Determine output to see what employment gives you  If you increase demand for output then you increase demand for labor Chapter 21: The Theory of Prices I Micro price determination vs. Q Theory price determination. Escape from this double life. II General price level, like individual, depends partly on remuneration of factors and partly on scale of output.  Scale of output affects price through productivity III At less than full employment, output responds to rises in M; at full employment, prices.  L shapes relationship between output and prices “The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking.” Vicious attack on “mathematical” economics.  Back then it wasn’t very mathematical  False precision IV Qualifications to points made in III: 1.Main influence of M on D is through r. Ratio between the two is V, though it can change. 2.If wages don’t change with output or if some part of equipment has greater cost per unit of output, then prices may rise as employment increases. 3.Bottlenecks reached successively. Sharp rises in certain commodity prices. Exact effect depends on speed of growth. 4.Succession of points at which wages will rise even before full employment. Semi- inflation. 5. Marginal user cost may fluctuate differently and more widely than wages. V True inflation: No further increase in employment, only prices rise. Asymmetry in the effect of changes in effective demand on output. Results from resistance to reductions in W. If not, there would be pure deflation, too. “We must have some factor, the value of which in terms of money is, if not fixed, at least sticky, to give us any stability of values in a monetary system.” (So sticky wages are the problem, or at least the identifying characteristic of a monetary economy?) Compare with “the nominal anchor.” VI Formalize and “exhibit the extreme complexity of the relationship between prices and the quantity of money.” VII Is there a long-run relation between money and prices? “...a question for historical generalization rather than for pure theory...” “...when money is relatively scarce, some means is found to increase the effective quantity of money...” So prices tend to rise over time. 19 thcentury: gilt-edge rates of 3 to 3.5 per cent were consistent with investment that kept “an average of employment which was not intolerably low...” At most a 50 per cent change in prices. Due to a balance of forces. (“The average level of employment was, of course, substantially below full employment, but not so intolerably below it as to provoke revolutionary changes.”) 193
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