ECON 295 Chapter Notes - Chapter 24: Vrije Universiteit Amsterdam, Macroeconomic Model, Nominal Rigidity
5 Dec 2017
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Chapter 24: from the short run to the long run: the adjustment of factor prices. Factor prices are assumed to be constant. Technology & factor supplies are assumed to be constant. Use this table as a test to know if you understand or not. Real gdp (y) is determined by ad & as. Technology & factor supplies (& thus y*) are constant/exogenous. Factor ps to & why real gdp tends to return to y* Potential output and the output gap (i) real gdp [y] < potential gdp [y*] recessionary gap (ii) real gdp [y] > potential gdp [y*] inflationary gap. Factor prices and the output gap (cid:2171)(cid:2177)(cid:2176)(cid:2172)(cid:2177)(cid:2176) (cid:2172)= . When y > y*, an inflationary output gap: demand for labor (& other factors/factor services) is relatively high. Plus high profits for firms (during infla output gap there are high profits for firms & unusually large demand for labor).
