Macroeconomics- Takeaway Notes
Monetary Policy
Topic Takeaway Diagram
Competitive • Labour Demand is where w=mpl as firms cannot pay less or workers
Labour Market will leave and cannot pay more as will lose money
• Labour Supply is upward sloping as real wage is the opportunity cost
of leisure. As real wage rises, agents switch from leisure
o Maximising the utility of agents
• Employment feeds into production function to set output and
equilibrium output is unique and invariant to consumer price level
fixing vertical AS curve
• In a competitive labour market, there is unique equilibrium quantity
of employment conditional on short term levels of A & K, that gives
unique level of output (output supplied is independent of the
nominal price level)
WS Curve • In an imperfect labour market, unions have bargaining power which
shifts the Labour Supply curve to the left
• The WS is divergent as, when employment increases, there is less
alternative labour supply available to firms (but this is an empirical
matter)
• WS will shift with shifts in Es based on changes in elasticity of
supply/demand
• Shifts in the curves do not necessarily have to be proportionate (e.g.
migration but new workers are not good substitutes so shift in Es
might not shift WS by same amount)
• The extent of the shift is determined by the bargaining power of the
unions:
o Legal frameworks: industrial relations laws, firing restrictions
, o Demographic factors: regional unemployment, migration, age
o Wage accords: union might limit wage premium in exchange
for public investment in industry/ improving work conditions
o Labour productivity- union takes increase in rise in output
• 1960s and 1970s closed shop industries required union membership
for employment gave unions big monopoly power
PS Curve • In an imperfect labour market, firms have monopoly power which
shifts the Labour Demand curve down
• The wedge between the curves is the MPL the firms takes as profits
• Slope is declining with labour input as productivity declines as
employment rises & larger market size means more competition
• Shift are determined by degree of monopsony power of firms:
o Firms goals: rise in productivity may be lead to raising profit
share
o Payroll taxation: shifts PS left
o FoP changing prices: oil price rise shifts PS left
o More/ less power for firm also influenced by presence of
natural monopolies, number of firms (oligopoly)
Equilibrium • In an imperfect labour market, there will be unvoluntary
Unemployment unemployment on top of voluntary unemployment
• Unvoluntary UE are those who are willing to work but cannot due to
rigidities in market power on labour
• Involuntary unemployment relates to degree of imperfect
competition in supply market
• Firm’s bargaining power and PS only affects total unemployment
• Welfare is always lower in imperfect labour markets as MPL exceeds
opportunity cost of working but wages can be higher or lower
depending on whether the market power is greater on the demand
(lower wages) or supply (higher wages) side
,Phillips Curve • Equilibrium output is not affected by inflation so the LR PC curve is
vertical (VPC)- coherent with the medium run equilibrium
• The VPC is the only equilibrium output level based on how labour
market is. The VPC only shifts if WS & PS shift.
• Theta: Union market power. Bigger theta- steeper WS
• Gamma: Firm market power. Bigger gamma- steeper WS
• Firms decide prices after wages demanded so firms determine the
final real wage as can set prices as well
• If inflation rises and real wages decrease, employment is stimulated,
the labour market then equilibrates back to ye
• The short run PC intersects the VPC at expected inflation= actual
inflation (WS=PS)
• PC curve is positively sloped as there is a wage-price spiral as output
increases: higher output means higher real wage target demanded
by unions and so higher price inflation from firms & PC keeps shifting
up and inflation spirals
• Inflation is only stable at the equilibrium output level- NAIRU
• PC Equation is:
o Alpha set by the steepness of the WS/PS slopes
(approximation- not exactly the two terms)- a larger alpha
means the economy has more flexible prices and so makes
more progress in adjusting to new equilibria
IS Curve • The IS Curve is given by
o rs: stabilising (equilibrium) real IR (level of IR that gives ye)
o a> 0, interest sensitivity of expenditure
, o Higher a, the smaller the IR change required to deal with a
shock
o A is affected by individual preferences, multiplier number
• A Change in Y is a movement along a curve, a demand shock is a shift
in the curve
• Assumption of one period lag between interest rate change and
change in output
Central Bank • Assumption that CB has perfect control over nominal rates
Role • Central Banks aim to minimise the quadratic loss function
where beta is the relative inflation aversion
• The bliss point is the point where the CB maximises its minimisation
of losses
MR Curve • The Monetary Rule (MR) is the CB’s best response to all possible
inflation levels in order to minimise losses subject to the inflation
constraint
• It is the runs through the tangents between loss contours and PC
curves
• MR Curve equation is
o A larger beta means a steeper MR (CB eliminates inflation
quickly)
o A larger alpha (sensitivity of inflation to output) means that
the output gap will have a bigger inflation change and so
inflation can be controlled more efficiently with a steeper PC
(larger alpha) as r needs to be changed left to control
inflation
Monetary Policy
Topic Takeaway Diagram
Competitive • Labour Demand is where w=mpl as firms cannot pay less or workers
Labour Market will leave and cannot pay more as will lose money
• Labour Supply is upward sloping as real wage is the opportunity cost
of leisure. As real wage rises, agents switch from leisure
o Maximising the utility of agents
• Employment feeds into production function to set output and
equilibrium output is unique and invariant to consumer price level
fixing vertical AS curve
• In a competitive labour market, there is unique equilibrium quantity
of employment conditional on short term levels of A & K, that gives
unique level of output (output supplied is independent of the
nominal price level)
WS Curve • In an imperfect labour market, unions have bargaining power which
shifts the Labour Supply curve to the left
• The WS is divergent as, when employment increases, there is less
alternative labour supply available to firms (but this is an empirical
matter)
• WS will shift with shifts in Es based on changes in elasticity of
supply/demand
• Shifts in the curves do not necessarily have to be proportionate (e.g.
migration but new workers are not good substitutes so shift in Es
might not shift WS by same amount)
• The extent of the shift is determined by the bargaining power of the
unions:
o Legal frameworks: industrial relations laws, firing restrictions
, o Demographic factors: regional unemployment, migration, age
o Wage accords: union might limit wage premium in exchange
for public investment in industry/ improving work conditions
o Labour productivity- union takes increase in rise in output
• 1960s and 1970s closed shop industries required union membership
for employment gave unions big monopoly power
PS Curve • In an imperfect labour market, firms have monopoly power which
shifts the Labour Demand curve down
• The wedge between the curves is the MPL the firms takes as profits
• Slope is declining with labour input as productivity declines as
employment rises & larger market size means more competition
• Shift are determined by degree of monopsony power of firms:
o Firms goals: rise in productivity may be lead to raising profit
share
o Payroll taxation: shifts PS left
o FoP changing prices: oil price rise shifts PS left
o More/ less power for firm also influenced by presence of
natural monopolies, number of firms (oligopoly)
Equilibrium • In an imperfect labour market, there will be unvoluntary
Unemployment unemployment on top of voluntary unemployment
• Unvoluntary UE are those who are willing to work but cannot due to
rigidities in market power on labour
• Involuntary unemployment relates to degree of imperfect
competition in supply market
• Firm’s bargaining power and PS only affects total unemployment
• Welfare is always lower in imperfect labour markets as MPL exceeds
opportunity cost of working but wages can be higher or lower
depending on whether the market power is greater on the demand
(lower wages) or supply (higher wages) side
,Phillips Curve • Equilibrium output is not affected by inflation so the LR PC curve is
vertical (VPC)- coherent with the medium run equilibrium
• The VPC is the only equilibrium output level based on how labour
market is. The VPC only shifts if WS & PS shift.
• Theta: Union market power. Bigger theta- steeper WS
• Gamma: Firm market power. Bigger gamma- steeper WS
• Firms decide prices after wages demanded so firms determine the
final real wage as can set prices as well
• If inflation rises and real wages decrease, employment is stimulated,
the labour market then equilibrates back to ye
• The short run PC intersects the VPC at expected inflation= actual
inflation (WS=PS)
• PC curve is positively sloped as there is a wage-price spiral as output
increases: higher output means higher real wage target demanded
by unions and so higher price inflation from firms & PC keeps shifting
up and inflation spirals
• Inflation is only stable at the equilibrium output level- NAIRU
• PC Equation is:
o Alpha set by the steepness of the WS/PS slopes
(approximation- not exactly the two terms)- a larger alpha
means the economy has more flexible prices and so makes
more progress in adjusting to new equilibria
IS Curve • The IS Curve is given by
o rs: stabilising (equilibrium) real IR (level of IR that gives ye)
o a> 0, interest sensitivity of expenditure
, o Higher a, the smaller the IR change required to deal with a
shock
o A is affected by individual preferences, multiplier number
• A Change in Y is a movement along a curve, a demand shock is a shift
in the curve
• Assumption of one period lag between interest rate change and
change in output
Central Bank • Assumption that CB has perfect control over nominal rates
Role • Central Banks aim to minimise the quadratic loss function
where beta is the relative inflation aversion
• The bliss point is the point where the CB maximises its minimisation
of losses
MR Curve • The Monetary Rule (MR) is the CB’s best response to all possible
inflation levels in order to minimise losses subject to the inflation
constraint
• It is the runs through the tangents between loss contours and PC
curves
• MR Curve equation is
o A larger beta means a steeper MR (CB eliminates inflation
quickly)
o A larger alpha (sensitivity of inflation to output) means that
the output gap will have a bigger inflation change and so
inflation can be controlled more efficiently with a steeper PC
(larger alpha) as r needs to be changed left to control
inflation
