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Post by Caroline on May 10, 2016 15:04:41 GMT
Why do we say in the As-Ad model that the economy is not yet at the new level of Yn? I thought the whole point was that in the medium run the curves in the AS-AD model would move so we moved away from the in this case higher Y and back to Yn. but in this question we make a new, higher Yn, instead of moving away from the Y>Yn back to Yn.
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gm
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Post by gm on May 10, 2016 16:32:27 GMT
If the natural rate of unemployment is affected, as is the case in this question, then Yn is affected as well.
Remember that less unemployment means more EMployment, which in turn means more output (all else equal...).
Therefore in the medium run, there is a new level of Yn.
Hope this helps!
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Post by Oliver on May 10, 2016 22:43:11 GMT
Hi,
It is important to understand what the AD and AS curves represent.
The AD curve represents the IS-LM model in (P,Y) space - the "demand" side of the economy. Things that affect AD (i.e. fiscal policy, monetary policy etc.) do not affect the potential of the economy to produce (i.e. it does not affect the natural rate of output).
The natural rate of output is determined by the supply side of the economy. And the natural rate of output can change, in our model for three reasons i) changes in bargaining power of workers ii) changes in how competitive the product market is, and iii) z that we called a "catchall" variable that captured a whole bunch of other stuff. If one of these things change, then the natural rate of output changes.
If one of those things changes and the natural rate of output changes, *actual* output will not necessarily adjust immediately. Thus, we get a transition period while output moves toward the new natural rate of output.
Best
Oliver
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Post by Caroline on May 11, 2016 8:22:39 GMT
Thank you!! Very well explained - but in the case of this question it was the mark-up that changed - but that is also then one of the variables that changes Yn?
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Post by V on May 11, 2016 11:09:10 GMT
What oliver said in reason ii refers to the mark up
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Post by Caroline on May 11, 2016 11:57:18 GMT
Thank you!! Very well explained - but in the case of this question it was the mark-up that changed - but that is also then one of the variables that changes Yn?
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gm
New Member
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Post by gm on May 11, 2016 13:08:03 GMT
Point (ii), a change in competition, is shown by a change in the mark-up.
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Post by Oliver on May 11, 2016 22:53:47 GMT
Yes, the mark-up of prices over marginal cost is a measure of how competitive the market is. In a perfectly competitive market, mark-up=0 and P=MC. In a monopolistically competitive market, mark-up>0.
Best
Oliver
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