Economic Concepts: Unemployment and Wages

Unemployment and Wage Settings

• Unemployment occurs at the intersection of wage setting (WS) and price setting (PS) curves.
• In the medium run, increasing unemployment benefits does not affect real wages.

Real Wages in Perfect Competition

• In perfect competition, if labor is the sole production factor and produces 3 units of output per labor unit, real wages in the economy will reflect this productivity.

Impact of Oil Price Decrease

• A decrease in oil prices in the medium run can lead to various economic adjustments, including potential changes in production costs and overall demand.

Minimum Wage Effects

• An increase in the minimum wage in the economy results in shifts of both WS and PS curves in the medium run, impacting employment levels and wage structures.

Central Bank Intervention

• When the Central Bank intervenes by increasing the nominal money supply to cushion against an oil price shock, the medium run may experience:
  • A lesser increase in prices compared to an economy with no intervention.
  • A larger increase in prices if the intervention is ineffective or imbalanced.

Money Demand Sensitivity

• Higher sensitivity of money demand to interest rates results in a:
  • Flatter Aggregate Demand (AD) curve due to larger shifts of the LM curve.
  • Steeper AD curve if the shift of the LM curve is limited, resulting from lower increases in aggregate demand from interest rate changes.

Nominal Money Supply Growth Effects

• An increase in the growth rate of nominal money supply in the medium run is associated with a larger rise in nominal interest rates.

Balanced Budget Spending Effects

• A balanced budget increase in spending accomplished by raising tax rates, alongside government expenditure increases:
  • Maintains the overall budget balance, affecting aggregate demand while sustaining initial output levels.
  • Studying the overall impact requires analysis of multiplier effects and the interplay between taxes and spending.

This quiz explores key economic concepts related to unemployment at the intersection of wage setting and price setting curves. It examines how real wages are affected by factors like unemployment benefits and competition in the labor market. Test your understanding of these fundamental economic theories.