5AggregateSupply(China).ppt

Be clear on the reasons why there is no long run effect In order to get more output need to pay more people higher wages Higher wages imply firms need to charge higher prices Higher prices negate the higher wages as far as workers are concerned We go back to original values of real variables Only affect nominal variables Policy is ineffective! * ?是清楚的原因没有长期效果——为了得到更多的产出需要支付更多的人更高的工资工资增长率意味着公司需要收取更高的价格——价格抵消更高的工资工人而言我们回到原始值的变量只有影响名义变量?政策是无效的! * We can only get an increase in Y in long run i.e. increase in Y* If induce people to work more Need increase in real wage Technology Efficiency Lower taxes? Reganomics Supply side economics Voodoo economics * Reagan Style Tax Cut Cut personal taxes Idea is that this will improve incentives People will work more Shift the LRAS to the right Increase Y* and reduce P Note that SRAS shifts also as expectations adjust to the new lower level But cutting taxes will shift the AD curve to right SR boom LR return to Y* with higher P Which happened? Both Demand effect larger Y0* LRAS Y AS(Pe) P AD0 AS(Pe) A B C AD1 Y1* D Comment So far we have show that policy (MP or FP) seems to be ineffective in the LR Policy can have an impact only in the short run i.e. only for as long as expectations fail to adjust Policy Irrelevance: Robert Lucas But only holds when we start from Y* When YY* policy can be relevant Dealing With Shocks The AS-AD diagram shows how an economy will automatically adjust to a shock Start from LR eqm Y=Y* Pe=P Suppose there is a fall in AD Eqm moves from A to B YY* This can only be a temporary eqm At B, PPe Real wages are higher than expected Prices fall, but by more than nominal wages See labour market diagram Workers are expensive Explains the decline in output Over time workers will Reduce price expectations Reduce wage demands SRAS shifts down Process continues until LR eqm is restored at C Real wage returns to original level Y=Y* Pe=P but at new lower level P Y Y* LRAS AD0 AD1 SRAS(Pe) A B C So the economy w