ECO101H1 Lecture Notes - Lecture 12: Human Capital, Diminishing Returns, Production Function
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ECO101H1 Full Course Notes
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Sr eq =/= lr eq: sras adjusts or. Suppose the following relationships for an economy hold: Ae = 31 + 0. 72y + 20 + 15 + 100 84 0. 12y. Without gov intervention, the recessionary gap is putting downward pressure on wages. When the economy is below potential there is excess supply of labour. Workers are willing to accept a lower wage and firms are willing to produce more as inputs costs decrease. Wages drop and as shifts right until output is at y* and the price level is lower. If prices are fixed, the increase in g can be found using the simple multiplier. However, as soon as prices flexible, the simple multiplier will understate the necessary aggregate expenditure shock. Need ae to increase more than that predicted by simple multiplier. Calculate exact amount, we need more info: equation for the ad and as curve -> tells how sensitive eq real gdp is to changes in prices.