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Unformatted text preview: Economics Midterm 2 Review Chapter 9: Models The FE Line: Equilibrium in the Labour Market Full employment level of employment N is the equilibrium level of employment reached after wages and prices have fully adjusted so that the quantity of labour supplied equals the quantity of labour demanded Full employment output Y is the amount of output produced when employment is at its full-employment level, given the current level of capital stock and the production function Full employment: Y = AF(K, N) The FE line is vertical at Y = Y b/c when labour market is in equilibrium, output equals its FE level, regardless of the IR Factors that shift the FE line Full employment level of output is determined by the FE level of employment and the current levels of capital and productivity Any change that affects the FE level of output will cause the FE line to shift When there is a capital stock increase,, labour supply increase or when there is a beneficial supply shock the FE line shifts to the right **refer to the table on page 284** The IS curve: Equilibrium in the Goods Market Goods market is in equilibrium when desired investment and desired national saving are equal Adjustments in the real IR help bring about equilibrium in the goods market Equilibrium in the goods market is described by a curve called the IS curve (for any level of output the IS curve shows the real IT for which the goods market is in equilibrium For all points on the curve I=S Investment curve slopes downward b/c an increase in real IR increase the uc of capital which reduces the desired capital stock hence desired investment...
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