ECO202Y5 Study Guide - Midterm Guide: Money Supply, Phillips Curve, Real Wages

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When firms restrict their hiring to only university- educated workers, they"re excluding the workers who have a high school diploma. Similar to examples given in class, this represents a negative shock in terms of job opportunities available to those with less education (recall the secretaries who only know how to use typewriters and don"t have pc skills). As a result, we would expect the number of people unemployed in the economy would increase since high- school educated workers who originally did have jobs will now lose those jobs. To show a higher unemployment rate, shift the ws curve to the right (from a to b) to show a higher rate of un. The supply side shock will shift the as curve to the left from as1 to as2 (from c to d) The corresponding natural level of output is indicated by point e, where the original price level intersects the new. Price levels increase mid-way thru year 1 to p1.