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

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