Chap 05_Delong

Chap 05_Delong - CHAPTER5 5-1 Questions spending spending...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 5 Building Blocks of the Flexible Price Model 5-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Questions What is a full employment analysis? What keeps the economy at full employment when wages and prices are flexible? What determines the level of consumption spending? What determines the level of investment spending? 5-2
Background image of page 2
Questions What determines the level of net exports? What determines the level of the exchange rate? 5-3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Full Employment Analysis Whereas in the growth model, we allowed for capital to accumulate, we now start looking at a shorter time horizon where capital is fixed. We will assume that wages and prices are flexible so that all markets clear supply equals demand in the labour market full employment analysis . Later, we will look at even shorter time horizon, where there is not enough time for even prices and wages to adjust. 5-4
Background image of page 4
Flexible Price Model Two sets of factors determine the levels of potential output and real wages the production function the balance of supply and demand in the labour market 5-5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Production Function Potential output (Y*) is determined by the size of the labour force the economy’s capital stock (K) the efficiency of labour (E) a parameter indicating how quickly returns to investment diminish ( α ) 5-6 ) L E (K, F Y* × = ) L (
Background image of page 6
Figure 5.1 The Production Function 5-7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Flexible Price Model The assumption that wages and prices are flexible was commonly made by “classical” economists Thus, this assumption is often called the classical assumption guarantees that markets work guarantees full employment guarantees that actual output is equal to potential output 5-8
Background image of page 8
Flexible Price Model The flexible price assumption is not always a good one a market economy does not always produce full employment The “Keynesian” model of Chapters 8 and 9 assumes that wages and prices are sticky and there is unemployment. The Classical assumption simplifies the analysis of the economy. 5-9
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Table 5.1 Classical Flexible Price versus Keynesian Sticky Price Analyses 5-10
Background image of page 10
The Labour Market Assume there are a large number of identical firms each firm owns K unit of capital stock each firm hires L workers and pays them the same wage W each firm sells Y units of output at a per unit price of P no firm has control over the price it receives or the wage it pays these are determined by the market 5-11
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Labour Market Labour Demand To determine how many workers to hire, the firm follows two rules hire workers to boost output stop hiring when the extra revenue from the output hired by the last worker just equals his or her wage 5-12
Background image of page 12
The Labour Market Labour Demand The value of the output produced by the last worker hired is the product price (P) multiplied by the marginal product of labour (MPL) The cost of hiring the last worker is his or her wage (W) The firm will keep hiring until 5-13 0 W - MPL P = ×
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/12/2011 for the course ECON 302 taught by Professor Alvero during the Spring '09 term at UBC.

Page1 / 58

Chap 05_Delong - CHAPTER5 5-1 Questions spending spending...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online