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  • Two-Part Structure of the Aggregate Economy Model

  • Partial Equilibrium Foundations of the Supply-Side Model

The WS-PS Model

The WS-PS model is a macroeconomic framework used to analyze the supply side of the economy and to evaluate problems of economic policy. It is named for its two core components: the wage-setting (WS) curve and the price-setting (PS) curve, which together model the outcomes of wage and price decisions across the economy.

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References

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Economics

Economy

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

CORE Econ

Social Science

Empirical Science

Science

Ch.2 Unemployment, wages, and inequality: Supply-side policies and institutions - The Economy 2.0 Macroeconomics @ CORE Econ

Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ

Introduction to Microeconomics Course

Related

  • The Upward-Sloping Economy-Wide Wage-Setting (WS) Curve

  • The WS-PS Model

  • Partial Equilibrium Foundations of the Supply-Side Model

  • Core Components of the Aggregate Supply-Side Model

  • The aggregate economy model is structured in two parts, each reflecting a fundamental type of decision made at the firm level. Match each part of the model with the economic interaction it primarily represents.

  • Imagine an economy where new legislation significantly strengthens the bargaining power of labor unions, leading to more favorable wage negotiations for workers across all industries. According to the foundational two-part structure of the aggregate economy model, which of the two core firm-level decisions is most directly impacted by this development?

  • Rationale for the Aggregate Model's Structure

  • The two-part structure of the aggregate economy model treats firm-level wage-setting and price-setting as completely separate and non-interacting processes to simplify the analysis of the labor and goods markets respectively.

  • Analyzing Market Competition Changes

  • Arrange the following statements into the correct logical sequence that describes the construction of the two-part aggregate economy model.

  • An economy experiences a widespread, significant decrease in the cost of imported raw materials used by all domestic firms. Within the two-part framework for the aggregate economy, which is built from firm-level behaviors, this change would most directly influence the component derived from firms' ____.

  • A large corporation announces it is giving all its employees a 5% pay raise. In the same announcement, it states that the prices of its products will also increase by 5% to cover the higher labor costs. How does this scenario relate to the foundational two-part structure of the aggregate economy model, which is built from firm-level behaviors?

  • Match each market characteristic with its most likely effect on competition and consumer welfare.

  • Definition of the Price-Setting (PS) Curve

  • The WS-PS Model

  • When constructing a model of an economy's supply side by first examining its key markets in isolation, the interactions between workers and firms are analyzed separately from the interactions between firms and customers. Which pair of assumptions correctly distinguishes the conditions under which each of these separate analyses is conducted?

  • Rationale for Simplifying Assumptions in Economic Modeling

  • Applying Simplifying Assumptions in Economic Analysis

  • In the initial construction of an economy's supply-side model, two key markets are analyzed separately under specific simplifying assumptions. Match each component of this analytical approach to its correct description.

  • In the initial stage of constructing an economy's supply-side model, the analysis of the goods market, which involves interactions between firms and customers, assumes that wages are flexible and determined within that market.

  • Justification for a Simplifying Assumption in Goods Market Analysis

  • In the partial equilibrium analysis used to build the supply-side model, the examination of interactions between workers and firms in the labor market is conducted under the simplifying assumption that ______ are constant.

  • An economist is studying the nationwide impact of a sudden decrease in consumer confidence. They begin by collecting data on individual household spending to calculate the total change in consumption for the entire country. Next, they analyze how this change in total consumption affects the labor market (hiring decisions), the goods market (production levels), and the financial market (interest rates), considering how these markets influence each other simultaneously. Which statement best breaks down the economist's two-step analytical process?

  • Arrange the following statements into the correct logical sequence that describes the process of building a foundational model of an economy's supply side, starting from its most basic analytical premise.

  • Critique of the Partial Equilibrium Approach

  • The Whole is Greater Than the Sum of its Parts in Macroeconomics

Learn After

  • Interdependence of Firm Decisions and Aggregate Outcomes in the WS-PS Model

  • The WS-PS Equilibrium as a Nash Equilibrium

  • Combining WS-PS Model with Lorenz Curve for Policy Assessment

  • The WS-PS Model as a Model of Income Distribution

  • Adapting the WS-PS Model for Imported Material Costs

  • Limitations of the WS-PS Model

  • The WS-PS Model as the Fundamental Driver of Inflation

  • Conceptual Framework of the WS-PS Model

  • Integrating the WS-PS and Multiplier Models to Explain Business Cycles

  • In an economy where wages are determined by bargaining between firms and workers, and prices are set by firms adding a markup over their labor costs, imagine that a widespread decrease in market competition allows all firms to sustainably increase their price markup. Based on this change alone, what is the predicted impact on the economy's equilibrium?

  • Equilibrium Unemployment in the Wage-Price Setting Framework

  • Evaluating a Labor Market Policy

  • In an economy where equilibrium is determined by the interaction of a wage-setting relationship and a price-setting relationship, consider a scenario where a wave of mergers permanently reduces the level of competition in the product market. Assuming no other changes, what is the resulting impact on the economy's equilibrium real wage and equilibrium level of employment?

  • Consider an economy where wage and price levels are determined by the interplay between firms' price-setting behavior and workers' wage-setting demands. If the government significantly increases the generosity and duration of unemployment benefits, how would this policy change be represented in the standard wage-setting/price-setting framework, and what would be the resulting effect on the equilibrium level of unemployment?

  • Analyzing Economic Trends with the WS-PS Framework

  • True or False: In an economic model where equilibrium is determined by the interaction of a wage-setting curve and a price-setting curve, a new government policy that significantly increases the bargaining power of labor unions will result in a higher equilibrium real wage and a higher equilibrium level of employment.

  • In an economic model where firms set prices as a markup over wage costs and workers' wage demands increase with the level of employment, consider a situation where the prevailing real wage is higher than the level consistent with firms' target profit margins. Which of the following outcomes is the most likely immediate reaction from firms?

  • In the context of an economic model that determines the equilibrium real wage and employment level by linking the labor market and the goods market, match each component of the model to its correct description.

  • In a model of the aggregate economy, the equilibrium real wage and employment level are determined by the interaction of two key relationships. One relationship, the 'wage-setting curve', reflects how wages are determined by labor market conditions. The other, the 'price-setting curve', reflects how firms set prices based on their costs and the competitive environment. Match each economic event below to its most direct impact on one of these curves.

  • In an economic framework where firms determine prices by setting a markup over their wage costs, a decrease in the real wage level that is consistent with firms' pricing decisions necessarily implies that the share of output per worker claimed by firms as profit has increased.

  • In an economic framework where the equilibrium real wage and employment are determined by the interaction of a wage-setting (WS) relationship and a price-setting (PS) relationship, consider a situation where the level of employment is temporarily above the equilibrium level. Arrange the following events in the correct chronological order to show how the economy adjusts back towards equilibrium.

  • In an economy described by a wage-setting (WS) and price-setting (PS) framework, suppose a temporary surge in demand pushes employment above its equilibrium level. Arrange the following events in the logical sequence that describes how the economy would adjust back towards its equilibrium.

  • Impact of Income Tax on Labor Market Equilibrium

  • In the economic framework that determines the equilibrium real wage and employment level, the point where the wage-setting and price-setting curves intersect represents a stable outcome where no single economic agent (firm, employed worker, or unemployed person) has an incentive to unilaterally change their behavior. This type of stable outcome is known as a(n) ____ equilibrium.

  • Analyzing a Productivity Shock in the WS-PS Framework

  • In an economic model where the equilibrium real wage and employment are determined by the interaction of an upward-sloping wage-setting (WS) curve and a horizontal price-setting (PS) curve, consider the introduction of a new government policy that significantly increases the value and duration of unemployment benefits. Which of the following correctly describes the resulting change in the model's equilibrium?

  • Definition of the WS-PS Model

  • The WS-PS Model as a Framework for Income Distribution

  • Determinants of a Firm's Price Markup

  • Adapting the WS-PS Model for Tax Analysis using the Real Post-Tax Consumption Wage

  • Integrating Demand-Side (Multiplier) and Supply-Side (WS-PS) Models

  • Graphical Representation and Interpretation of the WS-PS Model