Log in
HomeClass Notes1,200,000US530,000

ECON 101 Lecture Notes - Lecture 1: Aggregate Demand, Real Wages, Market Clearing

41 views2 pages
School
Stanford University
Department
Economics
Course
ECON 101
Professor
Adrien Auclert

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

The classical model and keynesian model are not the same. Classical model while the keynesian model assumes wages to be rigid downwards. During recession, consumers and firms cut down their expenses and workers are being retrenched. This causes unemployment to rise and output to fall (p0 to p1, and y0 to y1). The classical economists believed that this unemployment will lead to a pay-cut. At a lower wage (a lower cost of production), firms are willing to produce more (sras [w 0] shift to sras [w*]). Therefore, the classical model is a market clearing model and there is no sustained long-term unemployment. The wage is adjustable, because the workers want to keep their jobs and hence are willing to take the pay-cut. This cause p0 to drop to p1 and output also decrease from y0 to y1. But in this model, labour refuses to take a pay-cut. This causes unemployment to prevail in the long-run.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

ECON 2H03 Lecture Notes - Lecture 35: Royal Aircraft Factory F.E.2
azurebeetle392
ECN 301 Lecture Notes - Lecture 10: New Keynesian Economics, Nominal Rigidity, Stabilization Policy
greensheep522
ECON-E 202 Lecture Notes - Lecture 20: Aggregate Demand, Keynesian Cross
cerisegiraffe538

Related Questions

Please help wtih these economics questions. I'll give the best answer to the person who justifies their answer.. or someone who does well in economics and knows the subject area well.

Which of the following statements is not true about Say's Law?

A. People produce more goods than they want for their own use only if they seek to trade them for other goods.

B. Markets would be regularly hit by severe shortages and surpluses.

C. Desired expenditures will equal actual expenditures.

D. Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices.


Which of the following is not an assumption of the classical model?

A. Buyers and sellers react to changes in relative prices.

B. Households want to maximize economic well being.

C. Wages and prices will move freely in the upward direction but not the downward direction.

D. No single buyer or seller of a commodity can affect its price.


Money illusion is

A. when people think they are better off when their income increases even though prices have increased by the same amount.

B. when people are motivated by self-interest.

C. could not exist if the economy did not have competitive markets.

D. a basic condition that all classical economists assume people have.


Saving is not a problem in the classical model because

A. interest rates were flexible and savings were channeled into investment.

B. savers and investors were the same people.

C. the classical economists assumed that saving was beneficial to people for retirement.

D. saving would be spent by consumers eventually.


Which of the following statements is true?

A. There is an inverse relationship between investment and the interest rate.

B. There is no relationship between investment and the interest rate.

C. There is a direct relationship between investment and the interest rate.

D. Investment is always less than savings.


In the classical model, high unemployment due to either a demand or a supply shock

A. will return to its normal level quickly as wages adjust.

B. will persist if due to a supply shock but not if due to a demand shock.

C. can persist for an indefinite period of time.

D. never exists because unemployment can never deviate from its normal level.


The classical model makes little distinction between the long-run and short-run because

A. the model has not been fully developed yet.

B. prices adjust so fast that the economy is quickly moving towards the long-run.

C. the classical economists knew that we are always operating in the short run.

D. current changes influence the long run, so it is not possible to plan for the future.


In the classical model

A. the level of real GDP per year does not depend on the level of aggregate demand.

B. the level of GDP is demand determined.

C. the level of GDP determines prices independent of demand.

D. changes in aggregate supply affect the price level, not real GDP.


Which of the following is a true statement?

A. Classical economists believed output adjusted more than prices when aggregate demand fell while Keynes believed prices adjusted more than output.

B. Classical economists believed price adjusted more than output when aggregate demand fell while Keynes believed output adjusted more than prices.

C. A decrease in aggregate demand has no short-run effects according to the classical economists, but had significant effects according to Keynes.

D. A decrease in aggregate demand was not possible according to the classical economists, but was possible according to Keynes.


Which of the following is not a reason why GDP can be expanded beyond a level consistent with its long-run growth path in modern Keynesian analysis?

A. Prices and wages are flexible allowing for needed adjustments.

B. In the short-run existing workers can work more hours.

C. The existing capital stock can be used more intensively.

D. Higher prices induce firms to hire more workers.


A recessionary gap can be caused by

A. a decrease in aggregate supply holding aggregate demand constant.

B. an increase in aggregate demand holding aggregate supply constant.

C. an increase in the long run aggregate supply curve holding the aggregate demand constant.

D. a decrease in both aggregate demand and aggregate supply.



Question 1:

Economic discrimination puts the economy inside its production possibilities curve because discrimination:

promotes present consumption rather than production of capital goods.
often causes inflation, which reduces the nation's real output.
redistributes income from low-paid to high-paid persons.
arbitrarily blocks women and certain minorities from higher-productivity, higher wage jobs and thus keeps the economy from producing its maximum output.

Question 2:

Economic discrimination:

affects the distribution of domestic output and income, but not its total size.
places the economy at some point inside of its production possibilities curve.
affects the total size of domestic output and income, but not its distribution.
is shown as some point outside of an economy's production possibilities curve.

Question 3:

Labor market discrimination creates a:

larger domestic output but no redistribution.
redistribution of a smaller domestic output.
redistribution of a larger domestic output.
smaller domestic output but no redistribution.

Question 4:

An increase in the collective discrimination coefficients of employers will:

reduce the African-American wage rate, increase African-American employment, and lower the actual African-American-white wage ratio.
reduce the African-American wage rate, decrease African-American employment, and lower the actual African-American-white wage ratio.
increase the African-American wage rate, reduce African-American employment, and increase the actual African-American-white wage ratio.
increase the African-American wage rate, increase African-American employment, and increase the actual African-American-white wage ratio.

Question 5:

A reduction in the collective discrimination coefficients of employers will:

reduce the African-American wage rate, increase African-American employment, and lower the actual African-American-white wage ratio.
reduce the African-American wage rate, decrease African-American employment, and lower the actual African-American-white wage ratio.
increase the African-American wage rate, reduce African-American employment, and increase the actual African-American-white wage ratio.
increase the African-American wage rate, increase African-American employment, and increase the actual African-American-white wage ratio.

Question 6:

In the taste-for-discrimination model:

women and minorities are confined to a limited number of occupations.
white employers behave as if employing African-American workers adds to costs.
individual workers are judged by the characteristics of the groups to which they belong.
prejudiced white employers will never hire African-American workers.

Question 7:

Which of the following employers is the most prejudiced? Employer:

C whose d is $4.
A whose d is $0.
D whose d is $6.
B whose d is $2.

Question 8:

An implication of the taste-for-discrimination model is that:

other things equal, nondiscriminating firms will have lower production costs than discriminating firms.
discrimination will move a firm along its declining average total cost curve.
discrimination can lower a firm's production costs.
other things equal, discriminating firms will have lower production costs than nondiscriminating firms.

Question 9:

An employer is prejudiced, prefers to hire white rather than African-American workers, and is willing to pay higher wages to obtain white workers. This illustrates:

the crowding model.
statistical discrimination.
the taste-for-discrimination model.
reverse discrimination.

Question 10:

Empirical studies generally find that the estimated discrimination coefficient is larger in southern versus northern states. True or False: presuming that the wage differential is due to employer discrimination, this necessarily implies that there are more discriminating employers in the South than there are in the North.

1) As the unemployment rate rises:

A) the separation rate decreases.

B) the young and unskilled experience lower-than-average increases in unemployment.

C) the young and skilled experience larger-than-average increases in unemployment.

D) the young and unskilled experience larger-than-average increases in unemployment.

E) the proportion of the unemployed finding a job increases.

2) The natural level of employment will increase when which of the following occurs?

A) a decrease in the markup of prices over costs

B) an increase in the natural level of output

C) an increase in the actual unemployment rate

D) an increase in unemployment benefits

E) an increase in the markup of prices over costs

3) Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that:

A) the real wage will decrease by 4%.

B) the real wage will increase by 4%.

C) the nominal wage will increase by less than 4%.

D) the nominal wage will increase by more than 4%.

E) the nominal wage will increase by exactly 4%.

4) An increase in the minimum wage will cause:

A) a reduction in the equilibrium real wage.

B) an increase in the natural rate of unemployment.

C) an increase in the equilibrium real wage.
D) a decrease in the natural rate of unemployment.

E) no change in the natural rate of unemployment.

5) In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on:

A) firms' markup over labor costs.

B) the nominal wage.

C) the interest rate.

D) the expected price level.

E) government spending.

6) The short-run aggregate supply curve (AS) is upward sloping because:

A) an increase in output causes an increase in employment, a reduction in unemployment, an increase in the nominal wage, and an increase in the price level.

B) a reduction in the aggregate price level causes a reduction in nominal money demand and a reduction in the interest rate.

C) a reduction in the aggregate price level (P) will cause a reduction in the interest rate and an increase in output.

D) an increase in the aggregate price level will cause an increase in the interest rate and a reduction in output.

E) an increase in the nominal wage causes a reduction in the amount of output that firms are willing to produce.

7) Assume that the economy is initially operating at the natural level of output. A simultaneous expansionary monetary policy and an increase in oil prices will cause which of the following?

A) an increase in output and a reduction in the interest rate in the short run

B) a reduction in output and an increase in the interest rate in the short run

C) a reduction in output and a reduction in the interest rate in the short run

D) an ambiguous effect in output and an increase in the price level in the short run

E) an ambiguous effect in output and a reduction in the price level in the short run

8) Assume that the economy is initially operating at the natural level of output. A one-time 4% reduction in the nominal money supply will cause:

A) a 4% increase in the price level in the medium run.

B) a 4% reduction in the price level in the medium run.

C) a 4% increase in the real money supply in the medium run.

D) a 4% increase in the interest rate (i) in the medium run.

E) a 4% reduction in investment in the medium run.

9) The original Phillips curve implied that:

A) the markup over labor costs is zero.

B) the expected inflation rate is equal to last year's inflation rate.

C) a lower rate of unemployment causes an increase in the rate of inflation.

D) the inflation is always zero.

E) the expected inflation is always zero.

10) In the Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?

A) a rise in the minimum wage

B) a rise in the expected inflation rate

C) a rise in the employment insurance

D) a drop in the markup

E) a fall in the unemployment rate

2. Using the AS and AD, WS and PS, and IS-LM graphs, illustrate and explain the short run and medium run effects of less stringent enforcement of existing antitrust legislation (Monopolist market power increased) . Explain what happens to P, Y, I, W/P, I and u.