Upper Six Unit 2 Module 1 Topic 2
Types of UnemploymentFrictionalStructuralCyclicalVoluntaryNormalResidualSeasonal
Classical ModelUnemployment is a result of wages being too
highEmployers will not employ workers requiring
wages above equilibrium levelThe demand for labour in the economy is a
function of the marginal physical product of labour
MPP decreases as more workers enter the labour market
The supply of labour increases as wages rise
Quantity of labour
Real Wage
DL
SL
Unemployed
0 L2 L1 L3
W/P1
W/P2
Aggregate Demand
Total spending on goods and services in an economy
C + I + G + (X – M)
Curve
C+I+G+(X-M)Consumer spending – amount consumers
spend on goods, dependent on level of disposable income
Investment spending – expenditure by private sector on capital goods, affected by interest rates, technological change, expectations
Government spending – current and capital spending on public services
Net Exports – difference between exports and imports
AD Curve
AD
AD
Real GDP
Price level
Slopes downward from left to right because a lower price will:
•Raise demand for net exports•Increase purchasing power of households•Encourage bank lending
•Movement along curve
AD2
AD2
If any of the components of AD change for a reason other than price it will result in a shift. This could result due to:•A rise in expectations about the future•A cut in direct tax•An increase in the money supply•A fall in the exchange rate•A rise in the quality of domestic goods
Aggregate SupplyTotal output that firms in an economy are
willing and able to supply at different price levels in a given period of time
SRAS LRAS
Short run Aggregate Supply
Slopes upwards from left to right – higher prices mean ability to meet costs and greater profits
Shifts if productivity changes or payments to fop change
Long run Aggregate SupplyOutput firms produce after price level and factor
prices have fully adjusted after any shift in aggregate demand.
Keynesians illustrate LRAS as perfectly elastic at low levels of output, then upward sloping over a range of output and finally perfectly inelastic – in the long run the firm can operate at any level of output and not necessarily at full capacity.
New Classicals illustrate LRAS as verticalThe LRAS shifts due to changes in quality and
quantity of resources eg. Education, net migration, technology
LRAS (Keynesian)LRAS
Q1 Q2 Real GDP
Price level
0
LRAS (Classical operating at full capacity)
Real GDP
Price level
Q0
AD and AS
AD
AS
Q
P
Real GDP
Price level
AD1
AS1
Great WorkShow your understanding by doing some
questions
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