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If the firm reduces the wage-spending, so the point of the IS curve will move downward?
Is that correct?

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1 Answer 1

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No, it isn't correct.

In the standard model Aggregate Demand-Aggregate Supply, AD-AS, the IS-LM are part of the demand side of the model.

These curves are used to establish aggregate demand, that is a relation that links output to general level of prices, considering equilibrium in goods market and in money market. The IS curve represents equilibrium in goods market, in particular represents the pairs of output and rate of interest that determine equilibrium in the goods market.

Wages and market labour concern, instead, the supply side of the economy, wages enter the supply side of the model, so a reduction in wages affects the supply side, not demand side and IS.

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  • $\begingroup$ Thanks so much! You mentioned that a reduction in wage spending has no relation with IS-LM curve, right? because it affects the supply side. $\endgroup$
    – Nick
    Nov 18 at 18:05
  • $\begingroup$ Yes! Look at labour market to see the effects of a change in wages. $\endgroup$ Nov 18 at 19:46
  • $\begingroup$ Thanks, sir, do you know that does the globalization have an effect on IS-LM-PC model? $\endgroup$
    – Nick
    Nov 18 at 19:50
  • $\begingroup$ This is a too general and too broad question to be answered, wait to go ahed in your studies of economics to have a clearer idea of such questions. $\endgroup$ Nov 18 at 19:56
  • $\begingroup$ Does it make sense Sir? If firms reduce wage spending, so they have more money to put into production, hence, Investment drives demand, bcz IS-LM are part of the demand side. then it will affect the IS-LM curve? $\endgroup$
    – Nick
    Nov 18 at 20:49

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