Macroeconomics Models Essay Example | Topics and Well Written Essays - 1500 words

Macroeconomics Models - Essay Example The LM curve is derived from the assumption that money supply is not a function of interest rates and therefore given certain levels of money supply we can determine when the monetary at which levels the monetary sector is at equilibrium; the LM curve is derived as follows: The above diagram shows the derivation of the LM curve, MS represents money supply, When there is an increase in national income from Y1 to Y2 then this will shift the money demand schedule to the right from MD1 to MD2 and for the purpose of attaining equilibrium in the money market interest rates will shift from IR1 to IR2 and this relationship helps us to derive the LM curve above. A policy mix is the use of both fiscal and monetary policies, fiscal policies include the use of government expenditure while the monetary polices include money supply. An example is where the government reduces expenditure, this will shift the IS curve to the left and because and the monetary policy measure here would be to decrease interest rates from IR1 to IR2 in order to push back the economy to the natural rate of output Yn. From the above diagram when the government decrease its spending this shifts the IS curve to the left from IS1 to IS2, this will lead the monetary policy makers to decrease the interest rates for this reason the new equilibrium will be at Yn and IR2. Economists view the labour market as any other mark... A policy mix is the use of both fiscal and monetary policies, fiscal policies include the use of government expenditure while the monetary polices include money supply. An example is where the government reduces expenditure, this will shift the IS curve to the left and because and the monetary policy measure here would be to decrease interest rates from IR1 to IR2 in order to push back the economy to the natural rate of output Yn. From the above diagram when the government decrease its spending this shifts the IS curve to the left from IS1 to IS2, this will lead the monetary policy makers to decrease the interest rates for this reason the new equilibrium will be at Yn and IR2. 3. How do labour markets affect workers' bargaining power Economists view the labour market as any other market whereby labour has its own demand and supply, when the supply of labour is high then wage rates are low and on the other hand when the demand for labour is high then the wage rates increase. Therefore the demand and the supply will determine the equilibrium wage rates in an economy and also determine the workers bargaining power. 4. What is meant by the efficiency wage and what does it imply about the clearing of the labour market Efficiency wage is a concept that states that wage rates are not only determined by the supply and demand of labour and for this reason there is need to pay a higher wage rate to employees to increase efficiency and productivity of labour. This concept therefore states that wage rates should be set higher than the market clearing rate in order to achieve efficiency which is achieved through the higher pay than the market clearing. 5. How does Blanchard define and motivate the