ECON 1110 Chapter Notes - Chapter 24: Large Deviations Theory, Automatic Stabilizer, Aggregate Demand
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13 Mar 2016
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The boom that is associated with an inflationary gap generates a set of conditions high profits for firms and an excess demand for labour that tends to cause wages (and other factor prices) to rise. The slump that is associated with a recessionary gap generates a set conditions low profits for firms and an excess supply of labour that tends to cause wages (and other factor prices) to fall. Both upward and downward adjustments to wages and unit costs do occur, but there are differences in the speed at which they typically operate. Booms can cause to rise rapidly; recessions usually cause wages to fall only slowly. Following an aggregate demand or supply shock, the short-run equilibrium level of output may be different from potential output. Any output gap is assumed to cause wages and other factor prices to adjust, eventually bringing the equilibrium level of output back to potential.
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