Wage setting and price relationship expectations

Aggregate Supply | mnmeconomics

wage setting and price relationship expectations

We will call these forces: the wage setting relation and the price setting relation. 5 In that case, they wouldn't need to form expectations about the price level. The expected price level, Pe. ▫ The unemployment rate, u. ▫ A catchall variable, z, that stands for all other variables that may affect the outcome of wage setting. where W is wages, P is prices, u is the unemployment rate, and z (Or, using the incorrect price setting equation, P = (1 + m)W, you would get: . Since prices don 't change the new price level is at the level of expectations and we thus know.

So we have had prices going up and output going down in the short run.

bp_blanchard_macro_3|Technological Progress, Wages and Unempl|Study Guide|Multiple Choice

It gets worse in the medium run. Remember that the starting medium run equilibrium was where prices equal expected prices. Obviously if the supply shock is temporary, the AS curve will just shift back, but if it is permanent then firms will always face higher costs, so at any given level of prices, they will be able to produce less.

wage setting and price relationship expectations

This is what the shift of the AS curve has told us. So this supply shock has meant higher prices, lower output, and if the shock is permanent, a new lower natural level of output for the economy. Supply shocks are generally bad news.

wage setting and price relationship expectations

Now at this point the policy makers have a decision to make. Do they use expansionary fiscal or monetary policy, to try and increase output, or do they just leave things alone and see what happens. Now what happens if the policy makers try to use an expansionary fiscal or monetary policy to counter the loss of output? With the incorrect price setting equation: Show that it slopes in the correct direction.

Goods market equilibrium yields: Graph your results and the equilibria in i,Y space and in P,Y space.

Labor Market 1: Wage Determination

You do not need to solve for the expression for the equilibrium, but you should show that Yn,Pe is a point on the AS curve. A change in federal labor law gives unions greater bargaining power with employers. What are the new natural rates of unemployment and output?

Price and wage-setting in advanced Economies: takeaways from the ECB’s 2018 Sintra Forum

Show the changes in i,Y space and in P,Y space. What happens in the long run? This is the same as in Part 2: For given Pe, Y falls so the AS curve shifts to the left.

The dynamics are those shown on page of the text in figure In the long run, the AS curve passes through the AD curve at the natural level of output, so output has fallen and prices have risen.

wage setting and price relationship expectations

Note that the AD curve does not move. How do these changes compare to the effect of an increase in A?

wage setting and price relationship expectations

Which would workers prefer? Unemployment is unchanged, prices fall, and output increases.

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