Question

This question is worth 4 points. Please answer each part clearly. Labor Markets Agg. Production Function Real Wage Real GDP Price Level Ø 0 14 10 20 30 40 50 Employment (millions) 10 20 30 40 50 Employment (millions) 4 6 8 10 12 Real GDP a. Given the diagrams shown, describe the location of the LRAS curve. How did you decide on its location? b. Describe the sequence of what would happen if there was an improvement in technology throughout the economy - what (if anything) would happen to the production function, the LRAS, and the labor markets. c. Would there be economic growth?

Answer 1

A. From the panel A, it can be seen that the labour market attains equilibrium at the point where No. of Labours = 30 mill and the wage rate = w1

If we correspondingly look at Panel B of the figure, we find that, when the Labour supplied = 30 million, corresponding output produced in the economy = 8 (approx)

This is the point where the vertical LRAS curve will exist.

B. If there is improvement in technology throughout the economy, it will result in increased production of output in the Economy with the existing amount of capital and labour. We can see this marked increase in output by the shift in the Production function curve, which will tend to shift upwards. This will cause the LRAS curve to shift rightwards, indicating increase in Real GDP in the economy. The labour market will however remain unaffected, as the improved technology will not create any disturbance in the labour market equilibrium.

C. Yes, there will be economic growth, as with improved technology, there will be a positive marked shift in the level of production and output,resulting in economic growth.