1. 2. 3. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. Sketch the aggregate supply-aggregate demand ( AS-AD ) model and explain how real GDP and unemployment fluctuate in a business cycle.
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3C H A P T E R C H E C K L I S T
Explain the forces that determine potential GDP and the functional distribution of income between labor and other factors of production.
Each point A through E on the AS curve corresponds to the row identified by the same letter in the schedule.
Potential GDP is $10 trillion and when the price level is 110, real GDP equals potential GDP.
If the price level is above 110, real GDP exceeds potential GDP.
If the price level is below 110, real GDP is less than potential GDP.
This figure shows aggregate demand schedule and aggregate demand curve.
Each point A through E on the AD curve corresponds to the row identified by the same letter in the schedule.
Figure 8.3(a) shows macroeconomic equilibrium.
If the economy was at point A, firms would increase production and raise prices.
If the economy was at point E, firms would decrease production and cut prices.
The economy moves to macroeconomic equilibrium.
Figure 8.3(b) shows three types of macroeconomic equilibrium.
As the AD curve fluctuates, macroeconomic equilibrium moves along the AS curve and traces out three types of macroeconomic equilibrium.
If the real wage increases, leisure – not working – has become more expensive, so we expect people to consume less leisure, work more, i.e. supply more labor hours.
However, with a higher real wage, people have a higher income. If leisure is a normal good, we expect people will consume more of it, i.e. work less, supply fewer labor hours.
For an individual, the outcome is unclear. Many people cannot choose how many hours they work anyway; and it tends to be people with high hourly wage rates on the golf course on weekdays.
But in the aggregate, because the higher real wage is likely to draw people into the labor force who previously were not in the labor force, it is reasonable to presume that higher real wages will increase labor hours supplied. This seems to be consistent with actual aggregate behavior in the U.S.
Full employment occurs when the quantity of labor demanded equals the quantity of labor supplied.
Potential GDP is the real GDP produced on the production function by the full-employment quantity of labor.
2. Increases the quantity of labor supplied.
3. Increases the natural unemployment rate.