Chapter 24

Chapter 24 - Chapter 24 adjustment of factor prices from...

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Chapter 24 – adjustment of factor prices from short run to long run equilibrium Adjustment process in the economy to get it to come back to potential output – why there is a natural process that pushes the economy to potential output The Short Run – no specific calendar time, but we are talking about time Factor prices are assumed to be constant Technology and factor supplies are assumed to be constant The adjustment of factor prices: o Factor prices are flexible o Technology and factor supplies are constant The Long Run Factor prices have fully adjusted Technology and factor supplies are changed The adjustment process When the potential GDP is less than the equilibrium point, the output gap between the two is a inflationary gap. – prices will eventually increase When the potential GDP is more than the equilibrium point, the output gap between the two is a recessionary gap – prices will eventually drop Output GAP = Y* - Yo When Y>Y*, the demand for labor (and other factor services) is relatively high – this is as a result of increased productivity and consumption, due to a higher Y-GDP. positive output gap o An inflationary gap occurs o During an inflationary output gap there are high profits for firms and unusually large
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This note was uploaded on 04/07/2009 for the course ECON 295 taught by Professor Ragan during the Spring '08 term at McGill.

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Chapter 24 - Chapter 24 adjustment of factor prices from...

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