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AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
AS-AD and Government Policy
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AS-AD and Government Policy

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AS-AD and Government Policy

AS-AD and Government Policy

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  • 1. MG4014 Macroeconomics AS/AD
  • 2. Today <ul><li>Aggregate Supply and Demand </li></ul><ul><li>Derivation of Market Clearing Conditions </li></ul><ul><li>A look at Unemployment </li></ul><ul><li>Wages and Cost-Push in Ireland </li></ul>
  • 3. Notation <ul><li>AD Aggregate Demand </li></ul><ul><li>AS Aggregate Supply </li></ul><ul><li>C Consumption </li></ul><ul><li>I Investment </li></ul><ul><li>w wage rate </li></ul><ul><li>N population/ employed </li></ul><ul><li>B bonds issued </li></ul>
  • 4. Aggregate Supply and Demand <ul><li>Q1: Does a macroeconomic equilibrium exist? </li></ul><ul><li>Q2: If the answer to Q1 is true, then will this equilbrium generate full employment? </li></ul><ul><li>We’ve already talked about measuring total output, so revise your notes on GDP, GNI, etc. </li></ul>
  • 5. Aggregate Supply <ul><li>The total supply of goods and services produced in the economy in a given period </li></ul><ul><li>AS = (net output per hour)*(total hours of employment) = yN </li></ul>
  • 6. Aggregate Demand <ul><li>AD is the total demand for goods and services in an economy in a given period. </li></ul><ul><li>AD = C+I </li></ul><ul><li>C = cwN </li></ul><ul><li>AD= C+I- cwN+I </li></ul>
  • 7. Balance Condition <ul><li>Total Saving = wages saved + all profit income </li></ul><ul><li>= Nc(1-c)+N(y-w) </li></ul><ul><li>= Nw-Nwc+Ny-Nw </li></ul><ul><li>=Ny-Nwc </li></ul>
  • 8. Market Clearing <ul><li>AS = yN=cwN+I = AD </li></ul>
  • 9. 0 Equilibrium output Quantity of Output Price Level Aggregate supply Aggregate demand
  • 10. Unemployment and Government Fiscal Policy <ul><li>AD = C+ I + B = cwN + I + B </li></ul><ul><li>AS = yN = cwN + I + B = AD </li></ul><ul><li>yN- cwN = I + B </li></ul><ul><li>N(y-cw) = I+B </li></ul><ul><li>So N* = (I+B)/(y-cw) </li></ul>
  • 11. Stylised Facts <ul><li>1. High employment sustained over a few years will reduce profits. This is called the high-employment squeeze. </li></ul><ul><li>2. The availability of imports for an country’s goods place additional limits on the effectiveness of macro policies aimed at high employment. </li></ul>
  • 12. Stylised Facts <ul><li>3. Monetary policy and fiscal policy approaches to job creation are both effective and in different ways, and they may work at cross purposes. </li></ul><ul><li>4. Sustained high employment levels are possible, but we have to change the policy mix as we move through the business cycle. </li></ul>
  • 13. Cost-Push Inflation
  • 14. Materials Push
  • 15.  
  • 16. Next (and last) Time <ul><li>Inflation and growth </li></ul><ul><li>Read Bowles et al, chapter 18. </li></ul>

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