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10-22-07 - -when price increase wages are sticky then...

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Long run -nominal exchange rate=real exchange rate x (p*/p) P*=foreign market -if p increases faster than p*, then the dollar will weaken -in long run, P always determined by money supply 1) Classical a. No government b. Conservative 2) Monetarist a. Government controls money supply 3) Keynesian a. Much more concerned with the short run b. Large job for the government c. Liberal d. Market “failures” must be fixed by government e. Big assumption of Keynesians: some prices are “sticky”(very slow to adjust) f. We will assume wages are sticky -based aggregate supply(AS) and Aggregate demand (AD) Aggregate supply -quality of real GDP (Y) that firms plan to supply -two AS curves: -Long run AS -Short run AS Long run AS: -in Long run… real GDP=potential GDP -potential GDP is independent of price level -Why? When price increases, wages increase eventually -so in long run, “real wage” is unchanged Short Run AS
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Unformatted text preview: -when price increase, wages are sticky then “real wage” decreases-recall labor market-in equilibrium, unemployement rate=natural rate-then real GDP=potential GDP-when price increases, “real wage” decreases-then unemployment rate < natural rate-which means real GDP>potential GDP-so in SR, when price increases, so does Real GDP-in SR, Price increase, move along SRAS-Why? “real wage” decreases-so firms can produce more-in Long run wages not stickey-wages increase-this will shift SRAS-So in LR, real GDP=potential GDP-only change in economy is that prices are higher-keynesian exonomies ar concerned with temportary “burst” in real GDP-When LRAS shifts to right, economic growth 1) Increase in full employement quality of labor a. When LD=LS farther to right, increase in LRAS 2) Increase in capital or technology a. Increase in LRAS...
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