ECON 1BB3 Lecture Notes - Money Supply, Exchange Rate

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: Bridget O' Shaughnessy

Document Summary

The higher unemployment rate means that workers will gradually accept lower nominal wages. People expect prices to fall in the future and therefore the sras curve shifts out to the right. Long run equilibrium has a lower price level, a return to the natural level of output and a return to the natural rate of unemployment. shift out shift in (higher minimum wage means l falls) The ad curve slopes downward because of (i) the wealth effect, (ii) the real exchange rate effect, and (iii) the interest rate effect. If firms adjust their prices every day, the sras curve would be vertical - the reason it has a positive slope is because wages and prices do not adjust instantaneously. The lras is vertical because in the long run prices and wages do adjust completely. If this adjustment were to happen instantaneously then the sras and the lras curves would be the same.