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Adjustment Mechanism from High Employment Disequilibrium in the WS-PS Model
When employment in an economy is above its equilibrium level, an automatic adjustment process is triggered. At this higher level of employment, the real wage necessary to motivate workers (as per the wage-setting curve) is greater than the real wage that firms can offer while maximizing their profits (as per the price-setting curve). This pressure on wages squeezes firms' profit margins, making production more costly. In response, firms increase their prices to protect their profits, which in turn leads to a reduction in aggregate demand, output, and consequently, employment. This process continues until the economy returns to the stable equilibrium where the wage-setting and price-setting curves intersect.
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Introduction to Macroeconomics Course
Ch.1 The supply side of the macroeconomy: Unemployment and real wages - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
Introduction to Microeconomics Course
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Learn After
Figure 1.24: The WS-PS Model, Case 1: Employment Above Equilibrium
Figure 4.6: Causal Chain from Low Unemployment to Inflation
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