MDU Macroeconomics Lecture 4 Macro Policies and AS/AD

Aggregate Supply and Demand

Download the slides here: asad.ppt

Or, watch them here:

Q1: Does a macroeconomic equilibrium exist?

Q2: If the answer to Q1 is true, then will this equilbrium generate full employment?

We’ve already talked about measuring total output, so revise your notes on GDP, GNI, etc.

Aggregate Supply:

The total supply of goods and services produced in the economy in a given period

AS = (net output per hour)*(total hours of employment) = yN

Aggregate Demand

AD is the total demand for goods and services in an economy in a given period.

AD = C+I

C = cwN

AD= C+I- cwN+I

Total Saving = wages saved + all profit income

= Nc(1-c)+N(y-w)

= Nw-Nwc+Ny-Nw

=Ny-Nwc

Market Clearing

AS = yN=cwN+I = AD

Unemployment and Government Fiscal Policy

AD = C+ I + B = cwN + I + B

AS = yN = cwN + I + B = AD

yN- cwN = I + B

N(y-cw) = I+B

so

N* = (I+B)/(y-cw)

this is the equation for the equilibrium level of employment when AS=AD in the product market.

Reading for this lecture: Bowles et al, pgs 445–476

Unemployment: the persistent macro economic problem. Why does unemployment exist? Why does it still exist?

More stylised facts:

1. High employment sustained over a few years will reduce profits. This is called the high-employment squeeze.

2. The availability of imports for an country’s goods place additional limits on the effectiveness of macro policies aimed at high employment.

3. Monetary policy and fiscal policy approaches to job creation are both effective and in different ways, and they may work at cross purposes.

4. Sustained high employment levels are possible, but we have to change the policy mix as we move through the business cycle.

Wage Push in Ireland

Materials Cost Push

> Housing CPI Cost push

Unit Cost, Output and the Profit Rate

(a bad reproduction of figure 17.4, pg. 456)

Exports and Imports: the Irish experience.