ECN 204 Lecture Notes - Lecture 10: Potential Output, Aggregate Demand, Shortage

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A change in money wage rate, e. g. through a union. We can have an increase and then because of this, supply of the economy (because they ask for higher wages) the employer will have lower profit. Overall there is no change in total income; in macro higher wages does not mean higher demand. Instead it"s the cost of production that increases, lower profit will then give lower supply. The wages affect the as curve; it will shift it to the left. But this change in the wage rate does not change the potential gdp. Other things can such as better resources or technology etc. But if there is a higher potential gdp then it will shift the curve to the right. In the exam she will ask what happens if there is a decrease in the potential gdp, what will happen to short run and long run supply. The decrease can happen e. g. because of natural disasters.

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