Answered: (Medium Run) Labor market equilibrium…

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 6CQ

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Question

(Medium Run)

Labor market equilibrium is determined by the following 2 equations:

W = P^e F_(u,z)
P = (1+ m) W

Where:
W=nominal wage; P^e =expected price; u=unemployment rate; z=catch-all variables; P=price; m=mark-up.

b. By using the IS-LM-PC framework, explain what would happen in the short run, if the central bank decides not to change the policy rate (interest rate)!

c. Compare your answer to point b with the condition where the central bank decides to increase the interest rate in order to stabilize inflation!

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

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