MacroIII

MacroIII - Macroeconomics Dr.Safarzadeh Chapter7 Chapter8...

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Chapter7 Chapter8 Chapter9 Chapter10 Chapter11 Chapter12 Chapter13 Chapter14 Dr. Safarzadeh Macroeconomics
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Chapter 7: Putting All Markets Together        The AD - AS Model   Aggregate Price Level: Keynesian/Classical Controversy: Classical Economics:    Assumptions:   Flexible Prices and Wages (instantaneous Adjustment of  Prices and Wages)  Economic Implication: Left to Itself, Economy Will Arrive at Full-Employment  Equilibrium (Self-Corrective Mechanism of the Economy).   Full Employment of Economic Resources Policy Implication:  No Government Intervention
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Chapter 7: Putting All Markets Together        The AD - AS Model   Keynesian Economies:   Assumptions: Fixed or Sticky Prices and Wages Economic Implication:    Economy May Stay in  Recession or Depression for a Long Time. Policy Implication:  Government Intervention is  Needed to Move Economy Towards Full- Employment   Less than Full Employment or Unemployment    Equilibrium
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Chapter 7: Putting All Markets Together        The AD - AS Model   AD - AS Analysis:  The Role of Price(P) and Expected  Price (P e ): At the equilibrium Point, price equals to expected price  = P e .  An increase in P results in increase in P e .  An  increase in P  results in increase in wages through the  wages equation,  W = P e  F(U, Z) , and further increase in  Price level (P) is a link among all three markets Goods,  Money, and Labor Markets.
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Chapter 7: Putting All Markets Together        The AD - AS Model   Determinants of Y in Medium-Run:  AD-AS Wage Setting Rule:    W = P e  F(U, Z)  Price Setting Rule:     P = (1 + m)W  Solving the Two Equations Together Gives:         P = P e  (1 + m)F (U, Z)                       or e Determinants of AS:
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Chapter 7: Putting All Markets Together        The AD - AS Model   Implications of the Two Equations:   Increase in expected price (P e ) will increase price  level (P). Decrease in Unemployment (U) or Increase in  Output (Y) will Increase Price Level (P). Y         U        W       Cost       P    Increase in mark-up or power of unions will increase  price level.
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Chapter 7: Putting All Markets Together        The AD - AS Model   Aggregate Supply Curve (AS):   Equilibrium in Labor  Market.  Aggregate Supply Shows that Price Level (P) is an  Increasing Function of Output Level (Y).  As Y  increases, P increases.    AS Shifters:    Increase In Cost of Inputs (W)        Supply Shocks (Oil Prices)     Expected prices (P e ) e
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Chapter 7: Putting All Markets Together        The AD - AS Model
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This note was uploaded on 11/09/2009 for the course BUAD 350 at USC.

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MacroIII - Macroeconomics Dr.Safarzadeh Chapter7 Chapter8...

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