MGEA06H3 Lecture : Lecture notes for week 7

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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The as-ad model in the long run & bringing money into the model. N discuss the adjustment mechanism from the short run to the long run. N discuss how the economy will correct itself to its long-run equilibrium if y in the short run (y*) yfe. The effect of a change in wages on as and ad curves. N note: a rise in wages raises workers" income, but it lowers shareholders" income (profit falls) overall no change in (total) real. The theory says yes, inflationary or deflationary gap can be eliminated by change in (nominal) wages in the long run. Ae = c (y t + tr) + i (r) + g + x (e) im (e, y) income no change in ae ad does not shift when wages increase. N when wages rise, production costs increases firms" profit decreases.

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