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MG4014 Macroeconomics
AS/AD
Today
Aggregate Supply and Demand
Derivation of Market Clearing Conditions
A look at Unemployment
Wages and Cost-Push in Ireland
Notation
AD Aggregate Demand
AS Aggregate Supply
C Consumption
I Investment
w wage rate
N population/ employed
B bonds issued
Aggregate Supply and
Demand
Q1: Does a macroeconomic equilibrium exist?
Q2: If the answer to Q1 is true, then will this
equilbrium generate full employment?
We’ve already talked about measuring total
output, so revise your notes on GDP, GNI,
etc.
Aggregate Supply
The total supply of goods and services
produced in the economy in a given
period
AS = (net output per hour)*(total hours of
employment) = yN
Aggregate Demand
AD is the total demand for goods and services
in an economy in a given period.
AD = C+I
C = cwN
AD= C+I- cwN+I
Balance Condition
Total Saving = wages saved + all profit income
= Nc(1-c)+N(y-w)
= Nw-Nwc+Ny-Nw
=Ny-Nwc
Market Clearing
AS = yN=cwN+I = AD
Price
Level
Aggregate
supply
Aggregate
demand
0
Equilibrium
output
Quantity of
Output
Unemployment and
Government Fiscal Policy
AD = C+ I + B = cwN + I + B
AS = yN = cwN + I + B = AD
yN- cwN = I + B
N(y-cw) = I+B
So
N* = (I+B)/(y-cw)
Stylised Facts
1. High employment sustained over a few years
will reduce profits. This is called the highemployment squeeze.
2. The availability of imports for an country’s
goods place additional limits on the
effectiveness of macro policies aimed at high
employment.
Stylised Facts
3. Monetary policy and fiscal policy approaches
to job creation are both effective and in
different ways, and they may work at cross
purposes.
4. Sustained high employment levels are
possible, but we have to change the policy
mix as we move through the business cycle.
Cost-Push Inflation
Materials Push
Next (and last) Time
• Inflation and growth
• Read Bowles et al, chapter 18.