Figure 4.18: Integrated WS-PS, Phillips Curve, and Multiplier Model at Equilibrium
Figure 4.18 is a three-panel diagram illustrating the economy in a state of medium-run equilibrium.
- WS-PS Panel (Top): This panel shows the labor market's supply-side equilibrium. With employment on the horizontal axis and the real wage on the vertical axis, the upward-sloping, convex wage-setting (WS) curve intersects the horizontal price-setting (PS) curve at Point A. This intersection signifies a zero bargaining gap and establishes the equilibrium level of employment. The horizontal gap between this employment level and the vertical labor force line represents the structural unemployment rate, which is 7%.
- Phillips Curve Panel (Middle): This panel depicts the relationship between inflation and employment. Point A from the top panel is located on an upward-sloping, convex Phillips curve, which is drawn for a specific inflation expectation of 3%. At this equilibrium point, the actual inflation rate (on the vertical axis) is equal to the expected rate of 3%.
- Multiplier Panel (Bottom): This panel illustrates the goods market's demand-side equilibrium. With output (Y) on the horizontal axis and aggregate demand (AD) on the vertical axis, the aggregate demand curve, AD(medium), intersects the 45-degree line (where Y=AD) at Point A. This equilibrium occurs at an output level denoted as Y_{SEE}, which is consistent with the supply-side equilibrium level of employment shown in the other panels.
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Figure 4.18: Integrated WS-PS, Phillips Curve, and Multiplier Model at Equilibrium
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