Tutorial_CHAP19

Tutorial_CHAP19 - CHAPTER 19 Advances in Business Cycle...

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Chapter Nineteen 1 CHAPTER 19 Advances in Business Cycle Theory ® A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Nineteen 2 Real Business Cycle New Classical Model Keynesian Model Rational E ions Monet odel
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Chapter Nineteen 3 The interpretation of the labor market : Do fluctuations in employment reflect voluntary changes in the quantity of labor supplied? The importance of technology shocks : Does the economy’s production function experience large, exogenous shifts in the short run? The neutrality of money : Do changes in the money supply have only nominal effects? The flexibility of wages and prices : Do wages and prices adjust quickly and completely to balance supply and demand?
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Chapter Nineteen 4 Real business cycle theory emphasizes the idea that the quantity of labor supplied at any given time depends on the incentives that workers face. The willingness to reallocate hours of work over time is called the intertemporal substitution of labor. Consider this example: Let W 1 be the real wage in the first period. Let W 2 be the real wage in the second period. Let r be the real interest rate. If you work in the first period, and save your earnings, you will have (1 + r)W 1 a year later. If you work in period 2, you will have W 2 .
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Chapter Nineteen 5 Intertemporal Relative Wage = (1 + r ) W 1 W 2 Working the first period is more attractive if the interest rate is high or if the wage is high relative to the wage expected to prevail in the future. According to
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Tutorial_CHAP19 - CHAPTER 19 Advances in Business Cycle...

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