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The WS-PS Equilibrium as a Weak and Slow-Acting Magnet
The equilibrium in the WS-PS model acts like a magnet, but its pull is often weak and slow, leading to prolonged periods of disequilibrium. This explains why economies, like Germany after reunification, can take a long time to adjust to shocks. The very existence of extensive government and central bank policies aimed at economic stabilization further supports this idea; if economies self-corrected rapidly as some simple models suggest, such large-scale intervention would be unnecessary.
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Economics
Economy
Introduction to Macroeconomics Course
Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Empirical Science
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Intra-firm Coordination vs. Economy-Wide Inconsistency in the WS-PS Model
Adjustment Mechanism from Low Employment Disequilibrium in the WS-PS Model
Policy-Induced Shift Away from Nash Equilibrium
Divergence of Short-Run and Long-Run Policy Effects
Activity: Tracing Actor Responses to a Policy Shock in the WS-PS Model
The WS-PS Equilibrium as a Weak and Slow-Acting Magnet
Sequential Wage and Price Setting by Firms
Definition of the Bargaining Gap
Consider an economy described by the wage-setting (WS) and price-setting (PS) model. If the current level of employment is significantly above the equilibrium level, which of the following statements accurately analyzes the state of the economy at this point?
Analyzing an Economy with High Unemployment
In the WS-PS model, a disequilibrium where the wage demanded by workers exceeds the wage offered by firms is primarily caused by a failure of coordination within individual firms, such as the HR department setting wages that the marketing department cannot support with its pricing strategy.
Explaining Disequilibrium in the Labor Market
In a model where one curve represents the real wage required to motivate workers at different levels of employment (the wage-setting curve) and another curve represents the real wage that results from firms' profit-maximizing pricing decisions (the price-setting curve), match each employment scenario to its corresponding outcome.
Analyzing the Source of Economic Inconsistency
In a labor market model, when the real wage required to secure adequate worker effort is inconsistent with the real wage that results from firms' profit-maximizing price levels, the economy is in a state of ____.
An economy is currently operating at a level of employment higher than its stable equilibrium point. Arrange the following statements to describe the logical sequence of conditions that characterize this state of disequilibrium.
Analyzing a Policy Shock in the Labor Market
Analyzing Labor Market Disequilibrium
Adjustment Mechanism from High Employment Disequilibrium in the WS-PS Model
Learn After
German Reunification and Labor Market Adjustment
The Debate on Economic Self-Stabilization vs. Active Policy Intervention
An economy experiences a major negative shock, leading to a sharp increase in unemployment. Over the following decade, the unemployment rate remains significantly above its pre-shock level, declining only very gradually. From the perspective of the wage-setting and price-setting framework, which statement best explains this persistent high unemployment?
Evaluating Economic Self-Correction
Interpreting Labor Market Adjustment
The widespread and active use of government and central bank policies to manage unemployment and inflation strongly implies that an economy's natural adjustment process towards its equilibrium is both rapid and powerful.
Implications of Slow Economic Adjustment
Match each economic characteristic or observation with the theoretical view of economic adjustment it supports. The two theoretical views are: 'Equilibrium as a weak, slow-acting magnet' and 'Equilibrium as a strong, fast-acting magnet'.
An economic advisor makes the following statement: 'The government should not intervene after a negative economic shock. Labor markets are efficient and will rapidly return to their equilibrium level of employment on their own.' Which of the following real-world observations presents the strongest counterargument to the advisor's claim about the speed of this self-correction?
Evaluating Policy Stances on Economic Shocks
An economy, initially in a stable state, experiences a severe and lasting negative shock. Based on the principle that the economy's return to equilibrium is a slow and gradual process, arrange the following events in their most likely chronological order.
Evaluating Policy Arguments on Economic Adjustment