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Aggregate demand/supply model

我想問如果 an increase in nominal wage 咁對AD/SAS/LAS model 有咩影響呀?

1 Answer

  • 1 decade ago
    Favorite Answer

    Please try to draw a econ graph follows the below explanation, it would be easier to understand.

    1. Suppose we started at e* (AD=SAS=LAS). X-axis is GDP, Y axis is Price. I assume you know the shapes of the 3 lines. An increase in nominal wage would shift the SAS up because holding other factors constant, the cost of producing same amount of products increases at any price. But the LAS and AD remain constant.

    2. Then, GDP decreased while price increased. Unemployment rate increased and the economy is suffering recession in the short term.

    3. Since unemployment rate is inversely related to inflation rate according to the Philips Curve, increase in unemployment rate would lead to lower inflation rate.

    4. According to the Fisher real interest rate calculation, lower inflation rate means a lower interest rate (assume real interest rate remain constant).

    5. A lower interest rate means the cost of capital lower and encourage investment, which is one of the component of GDP. Therefore, as investment increase, GDP increases at any given price, shifting the AD curve up.

    6. AD curve shift up until it reaches new e** where AD'=SAS'=LAS. GDP back to original level while the price increased.

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