Study Guides (248,683)
Canada (121,693)
Economics (390)
EC140 (70)

EC140 Final: Final Exam Notes

6 Pages

Course Code
Ken Jackson

This preview shows pages 1 and half of page 2. Sign up to view the full 6 pages of the document.
Final Exam: Study Notes Chapter 29: Why wages change - Wages and the output gap o The excess demand or supply of labour will change the amount of wages o The NAIRU is reached when GPD is equal to Y*, the unemployment rate is set equal to the NAIRU. Stands for either non-accelerating inflation rate of unemployment or natural rate of unemployment. - Wages and expected inflation - Overall effect on wages therefore is o Change in nominal wages = output gap effect + expectation effect - These two forces effect what will happen to the AS curve - Actual inflation = output gap inflation + expected inflation + supply-shock inflation Constant inflation - If inflation and monetary policy have been unchanged in several years, the expected rate of inflation will tend to equal the actual rate of inflation - In the absence of supply shocks, if expected inflation equals real inflation GDP must be the same as potential GDP - Constant inflation occurs when rate of monetary expansion, the rate of wage increase, and the expected rate of inflation are all constant Demand Shocks - No monetary validation would resolve itself - Monetary validation – continued validation turns transitory inflation into sustained inflation fuelled by monetary expansion Supply shocks - No monetary validation may take a long time to recover - Monetary Validation – the return to real GDP would be faster but end in a far higher price level Inflation - Accelerating inflation: as long as an inflationary output gap persists, expectations of inflation will be rising, which will lead to increases in actual rate of inflation. - Disinflation o Removing monetary validation o Stagflation o Recovery - The cost of disinflation is the loss of output during the period Chapter 30 Employment - Over the span of many years, increases in the labour force are more or less matched by increases in employment. Over the short term, however, the unemployment rate fluctuates a lot in the short term due to changes in labour force - Generally, over time new jobs are added at the same rate as the labour force to sustain employment as well as increase the unemployment rate - Employment usually increases during inflationary periods and decreases during recessions - The amount of activity in the labour market is better reflected by the flows into and out of unemployment than by overall unemployment - Measurement is skewed often because: o Discouraged workers o Underemployed workers - Unemployment has serious costs o Lost Output o Personal Costs Unemployment Fluctuations - Unemployment varies largely in the short term and the reason for which is separated into two broad categories - Market-Clearing theories o This theory state wages adjust instantly to clear the labour market after any AD or AS shock. Therefore, GDP is always equal to Y* and NAIRU is the unemployment rate. No involuntary unemployment. - Non-Market-Clearing theories o Long term employment relationships: long term relationships between firms and workers are important in most labour markets, and wages in such labour markets do no adjust frequently to eliminate involuntary unemployment o Economic Climate vs economic weather: variation in real wages usually occur gradually and are determined by long term climate. Change in short term weather often do not affect wages unless they are large changes NAIRU - The NAIRU is based off of two unemployment types when it equals the unemployment rate o Frictional: unemployment that results from the turnover in the labour market as workers move between jobs  Always frictional unemployment even at potential output o Structural: Unemployment caused by mismatch in skills, industry or location between available jobs and unemployed workers  Natural causes: will increase if there is increase in pace for structure of demand in labour market or there or a decrease in the pace at which labour is adapting to these changes  Policy causes - Why does NAIRU change o Demographic shifts: greater labour force participation by groups with high unemployment rates increases by the NAIRU o Hysteresis: lagged effect of economic downturn o Globalization and structural change o Policy and labour-market flexibility Reduce Unemployment - Structural: o Resisting change o Assisting Adjustment Chapter 31: The government budget constraint - Government expenditure = tax revenue + borrowing - G + I x D = T + Borrowing o G = purchase of goods and services o I x D = debt-service payments = payments that represent the interest owed on a current stock of debt - G + I x D – T = Borrowing => Delta D = budget deficit - Primary budget deficit determines how much money is spent on spending from tax revenue - Budget surplus or deficit determines the difference between tax revenue and spending The Stance of Fiscal policy - The budget deficit function: for a given set of expenditure and taxation policies the budget deficit rises as real GDP falls, and falls as real GDP rises - Changes in GDP cause a change along the budget deficit function - Structural and cyclical budget deficits: o When real GDP equals Y* there is no cyclical component to budget deficit it is just structural o The actual budget deficit can sometimes exceed or be lower than structural in different growth or recessionary periods - Changes in stance of fiscal policy is actually based on changes in structural budget deficit Debt Dynamics - Debt-to-GDP ratio is determined by delta d = x + (r-g) x d o d = debt to GDP ration o x = governments primary budget deficit as percentage of GDP o r = real interest rate on government bonds o g = growth rate of real GDP o delta d = change in dept to GDP ratio The effect of debt and deficits - crowding-out effect: the offsetting reduction in private expenditure caused by the rise in interest rates that follows expansionary fiscal policy - in our macro model we assume that an increase in the government’s budget deficit leads to an decrease in national savings - Do defici
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.