Chapter Review Chapter 24: The Full-Employment Model
- Macroeconomic equilibrium focuses on equilibrium levels of aggregates: employment, output, saving, and investment.
- The real wage equates the demand for labor with the supply of labor. Increases in labor supply at each real wage are reflected in lower real wages, which induce firms to create additional jobs to match the increases in supply.
- The full-employment level of output is that level of output which the economy can produce with its given stock of plant and equipment, when labor is fully employed. It will increase with increases in the labor supply or as a result of new technologies.
- The real interest rate (which takes into account inflation) equates investment and saving. The desired level of investment decreases with increases in the real rate of interest. Household saving depends on income and the real interest rate. When the economy is at full employment, the interest rate is the main variable of concern in determining saving. Saving increases slightly with increases in the real interest rate.
- A decrease in saving leads to a higher real interest rate and lower investment. A decrease in investment at each real interest rate leads to an unchanged or lower level of investment, depending on the elasticity of saving.
- An increase in saving leads to a lower real increase rate and to increased investment. An increase in investment at each real interest rate leads to unchanged or higher investment, depending on the elasticity of saving.
- When saving and investment are equal, the demand for goods and services will equal the level of output at full employment. The capital market balances leakages and injections in the circular flow of income.
- All the markets in the economy are interlinked. Changes in one market have effects in all other markets.
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