Lec- Week 7

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Economics for Management Studies
Iris Au

1 ECMA06 The AS-AD Model in the Long Run The AS-AD Model in the Long Run & Bringing Money into the Model Outline Discuss how wages enter the AD-AS model. Discuss the adjustment mechanism from the short run to the long run. Discuss how the economy will correct itself to its long-run equilibrium if Y in the short run (Y*) Y . FE Discuss the natural adjustment mechanism and counter- cyclical fiscal policy under different settings. Introducing money in our model. www.notesolution.com2 The Effect of a Change in Wages in the AD-AS Model So far we have not included wages in the AD-AS model. In this section, we will discuss wages affect the AD and AS curves. Effect of a Change in Wage on AD AD shows the combination of Y and P such that AE = Y. Aggregate expenditure, AE is AE = C(Y T + TR) + I(r) + G + X(E) IM(E, Y) Since wages DO NOT enter the AE function, a change in wages would have no effect on AE A change in wage has no effect on AD. Why? A rise in wages, for example, raises workers income, but it also lowers shareholders income (profit falls). o They cancel out each other Overall no change in (total) real income no change in AE. www.notesolution.com
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