ECON1-UC 301.01
Professor Mui
Assignment 2
1.Aggregate Demand (AD) Curve
The aggregate demand is the total demand for goods and services in the economy. The aggregate demand curve is one that shows the negative relationship between aggregate output (income) and the price level. Each point on the AD curve is a point at which both the goods market and the money market are in equilibrium.
At all points along the AD curve, both the goods market and the money market are in equilibrium. The policy variables G, T and M are fixed. The equilibrium condition is C+I+G= Y
Shifts of the AD curve:
I. An increase in the money supply (Ms) causes the AD Curve to shift to the right, from AD0 to AD1. This shift occurs because the increase in Ms lowers the interest rate, which increases planned investment ( and thus planned aggregate expenditure). The final result is an increase in output at each possible price level.
II.An increase in Government purchases (G) or a decrease in Net taxes (T) causes the AD Curve to shift to the right from AD0 to AD1. The increase in G increases planned aggregate expenditure, which leads to an increase in output at each possible price level. A decrease in T causes consumption to rise. The higher consumption then increases planned aggregate expenditure, which leads to an increase in output at each possible price level.
Aggregate Supply (AS) Curve
With planned Aggregate expenditure of AE1 and aggregate demand of AD1, equilibrium output is Y1. A shift of planned aggregate expenditure to AE2, corresponding to a shift of the AD curve to AD2, causes output to rise but the price level to remain at P1. If planned aggregate expenditure and aggregate demand exceed Yf, however, there is an inflationary gap and the price level rises to P3.
2. Define:
a. The employed: Any person 16 years of age or older
I .Who works for pay, either for someone else or in his/ her own business for one or more hours a week. OR
II. Who works without pay for fifteen or more hours per week in a family enterprise. OR
III. Who has a job but has temporarily been absent, with or without pay.
b. The unemployed:
A person 16 years of age or older who is not working, is available for work and has made specific efforts to find work during the previous four weeks.
c. Labor force:
The number of people employed plus the number of people who are unemployed.
d. Unemployment rate:
The ratio of the number of people unemployed to the total number of people in the labor force.
e. Labor force precipitation rate:
The ratio of the labor force to the total population 16 years of age or older.
3. Causes of unemployment in a society can be understood by first looking at the types of unemployment as follows:
a. Unavoidable Unemployment is made up of Frictional Unemployment and Structural Unemployment. Frictional Unemployment is the portion of unemployment that is due to the normal working of the labor market, such as short-run job/skill matching problems. Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.
b. Natural rate of unemployment is the sum of frictional unemployment and structural unemployment.
c. Avoidable unemployment is cyclical unemployment is the kind of unemployment that occurs during recessions and depressions.
The causes for unemployment are based on different reasons that wage rates do not completely adjust when the demand for labor falls:
a. Sticky Prices: The downward rigidity of wages for the existence of unemployment. This means that the equilibrium wage gets stuck at a particular level and does not fall when the demand for labor falls. The result is unemployment of the amount difference between the quantity of labor that households want to supply and the amount of labor that firms want to hire at a specific wage rate i.e. the number of workers who would want to work at the specific wage rate but cannot find jobs.
b. Efficiency Wage Theory: This theory holds that the productivity of the workers increases with the wage rate. If this is so, firms may have an incentive to pay wages above the market clearing rate at which the quantity of labor is supplied is equal to the quantity of labor demanded.
c. Imperfect Information: Firms may not have enough information to know what the market- clearing wage is. In this case, firms are said to have imperfect information. If firms have imperfect or incomplete information, they may simply set wages wrong- wages that do not clear the labor market. If a firm sets wages too high, more workers will want to work for them than the firm can offer jobs, resulting in potential employees being turned away.
d. Minimum Wage Laws are laws that set a floor for wage rates- i.e. a minimum hourly rate for any kind of labor. They explain a small fraction of unemployment If the market clearing wage for some groups of workers is below this amount, the group will be unemployed.
4. Inflation can be defined as an increase in overall price level. It happens when many prices increase simultaneously over some significant period of time. A one time increase in the overall price is not considered inflation.
Inflation rates are measured by looking at a large number of goods and services, and calculating the average increase in their prices during a period of time and increases that continue over some significant period of time.
The causes for inflation are :
- Inflation versus sustained inflation
- Demand full inflation
- Supply side inflation
- Expectations and Inflation
- Money Inflation
