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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.