Download Macroeconomic Equilibrium

Macroeconomic Equilibrium
Chapter 8
Potential GDP
• Potential GDP: the level of real GDP
associated with full employment
– sustainable upper limit of production =
production possibilities frontier
• Actual real GDP can be
– equal to potential GDP (at full employment)
– greater than potential GDP (only temporarily)
– or less than potential GDP ( in recession)
Labor Market
• Demand for labor
– Relationship between the quantity of labor demanded
and real wage rate
– Shift of labor demand curve due to increase in
productivity and increase in product demand
• Supply of labor
– Relationship between the quantity of labor supplied
and real wage rate
– Shift of labor supply due to increase in working age
population and preference changes
• Labor market equilibrium
Job Search and Job Rationing
• Job search and its duration depends on
– Demographic changes occurring in population and households
– Unemployment benefits
– Structural changes
• Job rationing
– When real wage rate is higher than the equilibrium level. Why?
Because of
• Efficient wage
• Minimum wage law
• Union wage
– Job rationing results in increase in natural unemployment.
Aggregate Demand
• AD (Aggregate demand): relationship
between the quantity of real GDP
demanded and the price level
• Inverse relationship (downward sloping
curve)
• Shift of AD curve
– Change in taxes or government purchases
– Change in money supply and interest rate
– Change in foreign income
Aggregate Supply
• AS (Aggregate supply): relationship
between the quantity of real GDP supplied
and the price level
• Direct relationship (upward-sloping curve)
• Shift of AS curve
– Change in factors of production  change in
potential GDP  change in AS
– Change in cost of production factors (e.g.
money wage rate, oil price)
Macroeconomic Equilibrium
• Aggregate demand and aggregate supply
determine real GDP and the price level.
• Three types of macroeconomic equilibrium
– Full-employment equilibrium
– Above full-employment equilibrium
– Below full-employment equilibrium
• Inflation and recession
– Inflation occurs when AD increases more rapidly than
AS.
– Recession can occur when either AD or AS decrease.