tuto6 q5 - than Natural Unemployment Rate So the shortage...

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DATE : 23 OCTOBER 2014 TUTORIAL QUESTION : QUESTION 5 GROUP MEMBERS : 1. Gwee Shei Tian 2. Ginny Tey Chiu Jin 3. Chong Jia Hui 4. Lim Chin Da 5. Khoo Wei Eng 5. Using appropriate diagrams, explain how a self-regulating economy moves into long- run equilibrium from an inflationary gap. In an inflationary gap, the unemployment rate is lower than the natural unemployment rate because the demand of labour is greater than supply of labour. So, the firms will pay workers the higher wage rates. (a) Real GDP is greater than Natural Real GDP. So, the Unemployment Rate is lower
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Unformatted text preview: than Natural Unemployment Rate. So, the shortage in labour market happened. (b) Old contract expire, business firms will negotiate new contract that pay workers higher wage rates. While the wage rate rises, the cost of production become higher, the SRAS curve will shifts to the left. As the price level rises, the quantity demand of Real GDP decrease. At last, the economy moves into long-run equilibrium at point 2....
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