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Ch29 textbook notes

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Ch29 Textbook Notes March 11th, 2022 Inflation and Disinflation Inflation is a rise in the average level of prises (rise in the price level). The Bank of Canada’s target rate of inflation is 2% Anticipated and unanticipated inflation. Unanticipated inflation is the more serious problem. Unexpected changes in real wages and relative prices as inflation ends up being different from what was expected. This causes redistributions of income and may lead to inefficient changes in employment, investment, or output. Adding Inflation to the Model AD and AS shocks influenced the values of both real GDP and the price level. The economy’s adjustment process tended to push the economy back toward potential GDP with a stable price level. Inflation is temporary, it existed only while the economy was adjusting toward its long-run equilibrium. Why Wages Change Movements in relative wages are explained by many factors Power of industrial labour unions Firms’ market power The nature of work in specific industries The skills of the workers Increases in wages lead to increases in firms’ unit costs, because technology was assumed to be held constant. As wages and other factor prices rise, unit costs increase and the AS curve shifts up. Ch29 Textbook Notes 1 The forces that cause the overall level of nominal wages to change are the output gap and expectations of future inflation. Wages and the Output Gap Changes in wages are influenced by the output gap: 1. The excess demand for lab ...
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