MG4014 Macroeconomics AS/AD

Today Aggregate Supply and Demand Derivation of Market Clearing Conditions A look at Unemployment Wages and Cost-Push in Ireland

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

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.

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

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

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

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

AS = yN=cwN+I = AD

0 Equilibrium output Quantity of Output Price Level Aggregate supply Aggregate demand

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)

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 high-employment squeeze. 2. The availability of imports for an country’s goods place additional limits on the effectiveness of macro policies aimed at high employment.

1. High employment sustained over a few years will reduce profits. This is called the high-employment 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.

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.

Inflation and growth

Read Bowles et al, chapter 18.