Question

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply.

The price level

The inflation rate

The quantity of physical capital

The size of the labor force

Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate.

Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to----------------- , which will:

Shift the long-run aggregate supply curve to the left

Shift the long-run aggregate supply curve to the right

Not affect the long-run aggregate supply curve

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve.

	Direction of LRAS Curve Shift
The government allows more immigration of working-age adults.
This economy's primary source of foreign oil decides to cease exports for political reasons.
A government-sponsored training program increases the skill level of the workforce.

Answer 1

(1) In long run, increase in money growth will change Price level & Inflation rate.

(2) Graph is not provided.

(3) An increase in minimum wage will increase the natural rate of unemployment (since higher wage will lower demand for labor), which will shift short run aggregate supply to the left. The long-run aggregate supply will not be affected.

(4)

(a) More immigration of working-age adults will increase the supply of labor. As labor supply (workforce) increases, potential GDP increases, LRAS shifts toward right.

(b) As foreign oil supply decreases, there is oil shortage in domestic market which will increase cost of oil, so increasing the cost of production. This will reduce aggregate supply caused by a reduction in factors of production. LRAS will shift toward left.

(c) Increased skill level of workforce will increase productivity which will increase output. LRAS will shift rightward.

Answer 2

1. The concept of money neutrality tells that changes in money supply lead to changes only in nominal variables such as price level, wages, and inflation, but have no impact on real variables such as production. Therefore, an increase in money growth will increase only the price level and the inflation rate. 2. The unemployment rate is at its natural level and the real GDP is S70 billion. Since the unemployment rate is at its natural level the output must be at its natural level as well. Therefore, the current real GDP by the must be the long run real GDP as well. This is shown in the following figure, where the current real GDP of $70 billion is given by the intersection of the AS and AD curves, and since this real GDP level is also the natural output level, the LRAS curve has its horizontal intercept at this level of output. LRAS Price Level, P AS AD 70 Real GDP (in billion dollars) 3. An increase in minimum wage causes the natural rate of unemployment to increase and that leads to a fall in the natural level of output. Therefore, an increase in minimum wage will shift the long-run aggregate supply curve to the left. 4. (a) Immigration of working-age adults increases the production capacity of a nation, resulting in a rightward shift of the long-run aggregate supply curve. (b) When key resources that go into production processes become scarcer, the production capacity of an economy declines, resulting into a leftward shift of the long-run aggregate supply curve (c) When the skill level of an economy's workforce rises, the production capacity of the economy rises, resulting into a rightward shift of the long-run aggregate supply curve.