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Defining Normal Output using the WS-PS Model
The Wage-Setting/Price-Setting (WS-PS) model offers a structured approach to defining an economy's 'normal output.' In this framework, normal output is the level of production achieved at the equilibrium level of employment, which occurs where the Wage-Setting (WS) and Price-Setting (PS) curves intersect. This equilibrium-based output level is also often considered to be the level consistent with stable inflation.
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Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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National Bureau of Economic Research (NBER)
Defining Normal Output using the WS-PS Model
Economists sometimes use two different ways to identify a recession. One definition considers a recession to be a period of declining total economic output. A second definition considers a recession to be a period when total economic output is below its 'normal' or potential level, even if output is growing.
Consider an economy where total output is growing at a slow rate of 1% per year. However, most economic models suggest that its 'normal' level of output is much higher, and the current slow growth is not enough to reduce a high unemployment rate.
Based on this information, which statement accurately analyzes the situation?
Evaluating Competing Claims of a Recession
Economists use two primary technical definitions for a recession. The first defines a recession as a period of declining economic output. The second defines it as a period when output is below its 'normal' level, even if the economy is growing. Match each economic scenario with the description that best fits these definitions.
The Challenge of Defining a Recession
The Challenge of Defining a Recession
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An economy is operating at its normal level of output, defined as the point where the real wage from wage-setting behavior matches the real wage from firms' price-setting behavior. Imagine a new government policy is enacted that significantly increases the level of competition in the product market. Based on this change alone, how will the economy's normal level of output be affected?
Analyzing Economic Output Levels
Analyzing an Economy's Position
Identifying Normal Output
In the framework where an economy's 'normal output' is determined by the intersection of wage-setting and price-setting behaviors, this level of output is defined as the point where inflation is continuously accelerating.
Match each term related to the determination of an economy's normal output with its correct description.
In the framework that determines an economy's normal output through labor market equilibrium, this output level is achieved when the real wage desired by workers (from wage-setting behavior) is equal to the real wage firms are willing to pay (from price-setting behavior). This equilibrium level of output is also considered to be consistent with ______ inflation.
Arrange the following statements into a logical sequence that explains how an equilibrium in the labor market determines an economy's 'normal' level of output.
Consider an economic model where 'normal output' is determined by the equilibrium in the labor market, found at the intersection of a wage-setting (WS) relation and a price-setting (PS) relation. If a government enacts a new policy that substantially increases the generosity of unemployment insurance benefits, what is the most likely impact on the economy's normal level of output, holding all else constant?
Evaluating a Policy Proposal