By Frederick van Der Ploeg

ISBN-10: 0127117032

ISBN-13: 9780127117034

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40 Peter Neary W / /A. // // ,' • / / // / K / / / / / / // / / / / / Figure 12. 2. Taxonomy of effective equilibria. Comparative Statics The next step is to consider the effects of exogenous shocks on the different equilibria. As far as the effects of changes in w and p are concerned, these correspond to movements of the equilibrium point around the diagram without any shift in the tripod itself. Moreover, for movements within the C and K regions we can apply what we learnt from Figure 10. For example, unemployment is cost-determined in the C region, so iso-employment loci are rays from the origin there, the level of unemployment being higher the higher is the real wage.

Effective non-traded good market equilibrium loci. This is represented by the vertical straight line labelled ΝΝ' in Figure 9. While the derivation of the effective equilibrium loci is clearly more complicated as a result of the failure of the labour market to clear by wage adjustment, the properties of the model are not very different from those in the sticky-wage case with no non-traded good. For example, since the economy must always lie along the NN or NN' loci in Figure 9, a wage cut will always induce a tightening of the labour market.

While the derivation of the effective equilibrium loci is clearly more complicated as a result of the failure of the labour market to clear by wage adjustment, the properties of the model are not very different from those in the sticky-wage case with no non-traded good. For example, since the economy must always lie along the NN or NN' loci in Figure 9, a wage cut will always induce a tightening of the labour market. It may also be checked that increases in government purchases of traded goods lead, as before, to an exactly equal deterioration of the trade balance, without affecting the level of economic activity.

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Advanced Lectures in Quantitative Economics by Frederick van Der Ploeg


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