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Lec 4 Ch04 at Full Employment The Classical Model 04102022 091158am
Lec 4 Ch04 at Full Employment The Classical Model 04102022 091158am
Lec 4 Ch04 at Full Employment The Classical Model 04102022 091158am
THE ECONOMY AT
FULL EMPLOYMENT: CHAPTER
Production Possibilities
The production possibility frontier (PPF) is the boundary
between those combinations of goods and services that
can be produced and those that cannot.
Real GDP and Employment
Potential GDP
At a full employment level
of 200 billion hours,
potential GDP is 10 trillion
dollars.
Unemployment at Full Employment
Job Search
Job search is the activity of workers looking for an
acceptable vacant job.
All unemployed workers search for new jobs, and while
they search many are unemployed.
Unemployment at Full Employment
Demographic change
As more young workers entered the labor force in the
1970s, the amount of frictional unemployment increased
as they searched for jobs.
Frictional unemployment may have fallen in the 1980s as
those workers aged.
Two-earner households may increase search, because
one member can afford to search longer if the other has
an income.
Unemployment at Full Employment
Unemployment compensation
The more generous unemployment benefit payments
become, the lower the opportunity cost of unemployment,
so the longer workers search for better employment rather
than any job.
More workers are covered now by unemployment
insurance than before, and the payments are relatively
more generous.
Unemployment at Full Employment
Structural change
An increase in the pace of technological change that
reallocates jobs between industries or regions increases
the amount of search.
Unemployment at Full Employment
Job Rationing
Job rationing occurs when employed workers are paid a
wage that creates an excess supply of labor.
Job rationing can occur for two reasons
Efficiency wage
Minimum wage
Unemployment at Full Employment
Investment Decisions
Business investment decisions are influenced by
The expected profit rate increase ……. Investment inc
The real interest rate increase ……….. Investment dec
Investment, Saving, and the Interest Rate
Investment Demand
Investment demand is
the relationship between
the level of planned
investment and the real
interest rate.
Figure 8.7 illustrates an
investment demand curve.
Investment, Saving, and the Interest Rate
Saving
Investment is financed by national saving and borrowing
from the rest of the world.
Saving is current income minus current expenditure, and
in part finances investment.
Investment, Saving, and the Interest Rate
Saving is influenced by
The real interest rate direct
Disposable income direct
Wealth inverse
Expected future income inverse
Investment, Saving, and the Interest Rate
Wealth
The greater is a household’s wealth, other things
remaining the same, the greater is its consumption and the
less is its saving.
Expected Future Income
The higher a household’s expected future income, the
greater is its current consumption and the lower is its
current saving.
Investment, Saving, and the Interest Rate
Saving Supply
Saving supply is the
relationship between
saving and the real interest
rate, other things
remaining the same.
Figure 8.8 shows a saving
supply curve, which slopes
upward.
Investment, Saving, and the Interest Rate
Changes in Productivity
Labor productivity is real GDP per hour of labor.
Three factors influence labor productivity.
Physical capital
Human capital
Technology
The Dynamic Classical Model
An Increase in Population
An increase in population increases the supply of labor.
The equilibrium real wage rate falls and the equilibrium
quantity of labor increases.
The increase in the equilibrium quantity of labor increases
potential GDP.
The potential GDP per hour of work decreases.
The Dynamic Classical Model