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The flexibility of real wages money wages growing

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the flexibility of real wages (money wages growing slower than prices), which depends on attitude of wage-fixing authorities and the strength of unions Expansionary gap self correction involves increase in wages/prices/inflation 46
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2) Shocks to the cost of inputs (inflation shock) Sudden (unexpected) changes in the cost of inputs such as: oil price shocks increases in money wages (faster than rises in labour productivity) taxes on business exchange rate shocks and prices of imported inputs 47
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Shocks to the cost of inputs (inflation shock) . 48 Inflation ( ) 0 Output ( Y ) AD LRAS Y* SRAS SRAS’ Y
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Shocks to the cost of inputs (inflation shock) . 49 Inflation ( ) 0 Output ( Y ) AD LRAS Y* SRAS SRAS’ Y
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3) Shocks to potential output ( Y* ) Labour force: population ageing, famine, net migration Capital obsolescence Drought War 50
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Shock to potential output ( Y* ) . 51 Inflation ( ) 0 Output ( Y ) AD LRAS Y* SRAS SRAS’ Y*’ LRAS’
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3. Using the AS-AD model: Our major trading partners recover from the global financial crisis . 52 Inflation ( ) 0 Output ( Y ) AD (aggregate demand) SRAS (short run aggregate supply) LRAS (long run aggregate supply) Y* What happens to the economy in the short run? the long run? Should the government use stabilisation policies (other than RBA policy reaction function) to close the output gap? Consider the costs and benefits.
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3. Using the AS-AD model: Our major trading partners recover from the global financial crisis . 53 Inflation ( ) 0 Output ( Y ) AD SRAS LRAS Y* AD’ Y Short run equilibrium - inflationary gap
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3. Using the AS-AD model: Our major trading partners recover from the global financial crisis . 54 Inflation ( ) 0 Output ( Y ) AD SRAS LRAS Y* AD’ Y Long run equilibrium at higher inflation rate SRAS’
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3. Using the AS-AD model: Our major trading partners recover from the global financial crisis . 55 Inflation ( ) 0 Output ( Y ) AD SRAS LRAS Y* Alternative using contractionary fiscal or monetary policy to reduce aggregate demand AD’ Y Short run equilibrium Long run equilibrum with stabilisation policies
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56 3. Using the AS-AD model: There is a 200% increase in oil prices . Inflation ( ) 0 Output ( Y ) AD (aggregate demand) SRAS (short run aggregate supply) LRAS (long run aggregate supply) Y* What happens to the economy in the short run? the long run? Should the government use stabilisation policies (other than RBA policy reaction function) to close the output gap? Consider the costs and benefits.
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57 3. Using the AS-AD model: There is a 200% increase in oil prices . Inflation ( ) 0 Output ( Y ) AD SRAS LRAS Y* SRAS’ Y Short run equilibrium
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58 3. Using the AS-AD model: There is a 200% increase in oil prices . Inflation ( ) 0 Output ( Y ) AD SRAS LRAS Y* SRAS’ Y Short run equilibrium Long run equilibrium if self correct
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59 3. Using the AS-AD model: There is a 200% increase in oil prices .
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