practical4 - B01 ECONOMICS MACROECONOMICS Practical Lecture...

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1B01 ECONOMICS: MACROECONOMICS Practical Lecture 4: The AS-AD ModelRecap: Goods Market IS-LM Framework Money Market Short Run Analysis So far, we have limited our study to the short runand taken prices as exogenous. Goods Market AS-AD Framework Money Market Medium Run Analysis Labour Market Pe= P in equilibrium
2In the medium run, prices are now endogenously determined. Equilibrium in the medium runoccurs when:
3Derivation of Aggregate Demand RelationIS Relation (Equilibrium in the Goods Market): Y = []GibbTccbc++20101111LM relation (Equilibrium in the Money Market): idYdPM21=Equilibrium in the IS-LM Framework: Y = ++++GPMdbbTccddbbc2201021211111
4
5i LM1i IS LM0B B A A Y m1m0P B P1P0A AD Y
6Derivation of Aggregate Supply RelationWage Setting and Price Setting Relations: µ+==+11),(PWzuFPWePSWSAggregate Supply Relation: +=zLYFPPe,1)1(µEquilibrium unemployment rate (medium run concept with Pe=P) determined by: ()zuFPPn,)1(µ+=)1(1,µ+=+zuFn
7P AS P1P0Y0Y1Y

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