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Building the Aggregate Supply: Wage and Price Determination, Natural Rate of Unemployment, and Dynamics

This lecture covers topics such as wage determination, price determination, the natural rate of unemployment, and the dynamics of the aggregate supply. It explores the relationship between wages, prices, unemployment, and output in both the short and long run.

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Building the Aggregate Supply: Wage and Price Determination, Natural Rate of Unemployment, and Dynamics

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  1. Lecture 12: Building the Aggregate Supply • Current Events • Wage and price determination • The natural rate of U • From natural U to natural Y • Aggregate Supply

  2. Building the Aggregate Supply • The labor market • Simple markup pricing • Long run (Natural rate: Aggregate demand factors don’t matter for Y) • Short run • Impact: Same as before but P also change (partial) • Dynamics (go toward Natural rate)

  3. Wage Determination • Bargaining and efficiency wages e W = P F(u,z) Real wages Nominal wage setting Bargaining power Fear of unempllyment Unemployment insurance Hiring rate (reallocation) Bargaining

  4. Price Determination • Production function (simple) Y = N => P = (1+) W

  5. The Natural Rate of Unemployment • “Long Run” P = P • The wage and price setting relationships: e W = F(u,z) P P = 1+  W => The natural rate of unemployment F(u,z) = 1 1+ 

  6. W/P 1 1+  Price setting Wage setting u Unemployment n z, markup

  7. From u to Y n n u = U = L - N = 1 - N = 1 - Y L L L L F(1 - Y /L, z) = 1 1+  n

  8. W/P Wage setting 1 1+  Price setting Y Y n z, markup

  9. Aggregate Supply e W = P F(1-Y/L,z) P = (1+ ) W => P = P (1+ ) F(1-Y/L,z) e

  10. e P = P (1+ ) F(1-Y/L,z) AS P e P Y Y n e P (t) = P(t-1) [for now] => AS: P(t) = P(t-1) (1+ ) F(1-Y(t)/L,z)

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