Midterm Review_AAP-09_B&W

Purchases of the government these demands jointly

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Unformatted text preview: on the: 1. Consumption-saving decision of the Consumptionhouseholds, 2. Investment decision of the firms, and 3. Purchases of the government • These demands jointly determine the equilibrium Wages, rental rate, output Wages, 22 Growth Accounting ∆Y/Y = ∆A/A + α(∆K/K) + (1 - α)(∆L/L) • This is the growth accounting equation growth • Its purpose is to separate The output growth due to the accumulation of The inputs, and The output growth due to productivity increases The 23 The Labor Market TOPIC 5 24 Individual Labor Supply • Effect of a temporary increase in the real wage temporary (i.e., holding wealth constant) The Substitution effect: The Substitution When current real wage (w = W/P) ↑, opportunity cost of When leisure ↑ This tends to ↑ labor supplied This The Income effect: The Income Higher wages imply that you can work less and make the same Higher income as before This tends to ↓ labor supplied This We assume that the substitution effect dominates We T...
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