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The Dynamics of Inflation and Employment in the Full‐Employment Zone: A Theoretical Analysis *
Author(s) -
LAING N. F.
Publication year - 1978
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1978.tb00331.x
Subject(s) - economics , aggregate demand , wage , demand shock , redistribution (election) , excess supply , short run , inflation (cosmology) , general equilibrium theory , demand curve , multiplier (economics) , relative price , labour economics , supply and demand , macroeconomics , microeconomics , monetary policy , physics , politics , theoretical physics , political science , law
The paper is concerned with an economy in which some sectors reach full employment before others as demand expands. The position of short‐run equilibrium of employment and excess demand is determined by the intersection of the aggregate demand schedule and the short‐run output function, which shows the level of output induced by different levels of aggregate demand. The dynamics of the short‐run equilibrium position are explored. It is shown that equilibrating forces due to relative price changes must predominate over disequilibrating forces due to the redistribution of income, in the absence of exogenous shocks and induced cost inflation. The latter is shown to be subject to a multiplier effect. The paper ends by drawing the policy implications of the analysis. It refutes the acceleration thesis by showing that the level of the real wage does not tend to change under excess demand and argues that if the economy is taken into the full employment zone forces will be set to work which tend to remove the bottlenecks.