ch9anotes - IS FE Analysis We now develop two useful tools,...

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IS FE Analysis We now develop two useful tools, IS & FE . Will be used in Keynesian analysis. IS & FE also helpful for Classical model. FE Combinations of r and Y consistent with labor market equilibrium. Simplest case: ND = NS N ND , NS independent of r . Combine N , A & K Y When Y independent of r , FE vertical.
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FE for ND , NS independent of r. FE Y r Y
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Shifts in FE A temporary increase in A Real Wage 1 w 2 w 1 N 2 N N NS ) ( 1 A ND ) ( 2 A ND
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A temporary increase in A Y r 1 Y 2 Y 2 FE 1 FE Shifts in FE An increase in A : FE shifts right. An increase in population: FE shifts right. An increase in K : FE shifts right.
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Interest Rates and Labor Supply As before higher r → more saving. Increased savings requires d C . Another option? Consume less and work more . Therefore NS increasing in r . Labor Market Equilibrium Real Wage ND NS 1 w N
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An Increase in r A Rightward Shift in Labor Supply w 1 w 2 w ) ( 1 r NS ) ( 2 r NS 1 N 2 N N ↑⇒ = Y r N AK Y 7 . 0 3 . 0
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FE for NS increasing in r FE Y r 1 r 2 r 1 Y 2 Y Shifts in FE An increase in A : FE shifts right. An increase in population: FE shifts right. An increase in
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This note was uploaded on 07/17/2008 for the course ECON 502.01 taught by Professor Mccafferty during the Spring '08 term at Ohio State.

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ch9anotes - IS FE Analysis We now develop two useful tools,...

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