1 / 6

Long Run Macroeconomics Dynamics

Explore the self-correcting nature of the economy in the long run, from expansionary gaps to contractionary gaps, and equilibrium principles. Learn how wage contracts, resource prices, and aggregate demand affect macroeconomic stability.

pamela-campbell
Télécharger la présentation

Long Run Macroeconomics Dynamics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 8 Long Run Macroeconomics – The Self Correcting Economy

  2. Long Run • Period where wage contracts and resource prices are flexible

  3. Expansionary Gap • Expansionary Gap = Actual GDP > Natural (Potential) GDP (inflationary) • AD or AS shifts to the right causing the gap • Overemployment exists • Overtime work, Greater than capacity capital use, labor in short supply • As wage contracts end they are renegotiated at a higher rate • Wages rise • Costs rise for firms • Firms produce less • SRAS shifts to the left to the Potential GDP • Incomes fall

  4. Contractionary Gap • Contractionary Gap = Actual GDP < Natural (Potential) GDP (unemployment) • AD or AS shifts to the right causing the gap • Unemployment exists • Idle workers, lower than capacity capital use, labor in great supply • As wage contracts end they are renegotiated at a lower expected inflation rate • Wages fall • Costs fall for firms • Firms produce more • SRAS shifts to the right to the Potential GDP • Incomes began to rise

  5. Long Run Aggregate Supply (LRAS) • Vertical at the Potential GDP • Outward shift in the PPC causes the LRAS to shift leftward • Long Run Equilibrium • Actual Price level = Expected Price level • Actual GDP = Potential GDP • Qs = Qd • Long Run Aggregate Supply is Vertical at the Potential GDP, no price surprises

  6. Problems • Wages don’t decrease but they do • Takes to long to self-correct (6 years)

More Related