Lecture 6. The Labor MarketReading: Blanchard, Chapter 7
In the previous lecture…•The IS-LM model: General equilibrium in the short run.•The goods market (IS) + The money market (LM)•In the short run, 𝑃does not change.•Output is largely determined by the demand Z.•So far, we have studied the demand side of the economy. We now start to think about the supply (production) side of the economy. That is, firms hire workers to produce goods and services.
What we did not cover in Lecture 5…•Some History of the IS-LM Model / the short run•Derivation•The Goods Market and the IS Relation•Financial Markets and the LM Relation•Applications•Fiscal Policy in the IS-LM Model•Monetary Policy in the IS-LM Model•Monetary-Fiscal Policy Mix
An example•When Bill Clinton was elected President in 1992, one of his priorities was to reduce the budget deficit using a combination of cuts in spending and increases in taxes.•Clinton was worried because 𝑇 ↑and ? ↓ → 𝑌 ↓•The right strategy was to combine a fiscal contraction (by the govt) with a monetary expansion (by the CB).
Announcements (October 8)•Problem set 2 is due on Oct 14, which is Monday, not Tuesday. Please submit your answer before 10 pm. No late-submission will be accepted.•Oct 8: The Labor Market•Oct 10, 15: The AS-AD Model•Oct 17: Review•Oct 22: Midterm
Outline•Basic facts about the labor market•Definition and cyclicality of the related variables•A model of the labor market•Wage determination•Price determination•The natural rate of unemployment and the natural level of output