MacroEcon 8

MacroEcon 8

1. Relations, GDP and Unemployment

   • Okun’s Law: the negative relationship between GDP and unemployment.
   • SR - prices are sticky so output & employment depend on demand, which is affected by fiscal & monetary policy & exogenous change
   • AD curve - relationship between price level and quantity of output demanded
     • based on QTM
   • Long run aggregate supply curve
     • Many prices are sticky in the short run.  We therefore assume that  all prices are stuck at a predetermined level in the short run.  firms are willing to sell as much at that price level as their customers are willing to buy.  Thus, the short-run aggregate supply (SRAS) curve is horizontal.

2. Shocks: Exogenous changes in aggregate supply or demand, usually unanticipated.  Shocks temporarily push the economy away from full employment.

   • A supply shock alters production costs, ultimately affecting the prices that firms charge.  Examples of adverse supply shocks:  Bad weather reduces crop yields, pushing up food prices.  Workers negotiate higher wage increases.
     • Favourable supply shocks lower costs and prices, for example an improvement in production technology.
       • Stabilisation policy  Definition: Policy actions aimed at reducing the severity of short-run economic fluctuations.

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