Macro Equilibrium - Macro Equilibrium o In lecture we covered Aggregate Demand o Now we look at Aggregate Supply which comes in two forms Short Run

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Macro Equilibrium o In lecture we covered Aggregate Demand o Now we look at Aggregate Supply, which comes in two forms: Short Run Aggregate Supply (SRAS) and Long Run Aggregate Supply (LRAS) o Let’s start by looking at Short Run Aggregate Supply Key assumption: Sticky Wages (aka Downward Nominal Wage Rigidity). Translation: wages can’t fall (at least not in the short run) The idea behind sticky wages is that it’s very difficult to lower nominal wages. A few reasons: a) your employees will just go work elsewhere if you’re the only one lowering wages, b) you can’t get everyone to agree to lower wages (you’d have a reason to cheat), and c) it just looks really bad for your industry to slash wages Another unintended result: it’s nearly as hard to raise nominal wages (what if you have to lower them later???) Even if you choose to lay off workers, you need to pay them severance! So you might as well have them work. What this means is that we have some fixed costs—you have to pay your workforce their wages no matter how much they produce . You also have variable costs—for example, the amount of commodities (items like steel and crude oil that are only sold as inputs for other goods) you use, and therefore their overall cost, will depend on how much you choose to produce So… if you face some given wage level and some given commodity prices, and the price of your produced good is low It costs you a lot up front to produce, due to wages. But this doesn’t matter! You’ve already signed up to pay your workers, and
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This note was uploaded on 11/28/2011 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Macro Equilibrium - Macro Equilibrium o In lecture we covered Aggregate Demand o Now we look at Aggregate Supply which comes in two forms Short Run

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