Question

The U.S. population has grown at a relatively consistent 1 percent per year. Using a Classical, or

long run, perspective, and using the tools presented in class (i.e., an IS-LM framework, an AS-AD

diagram, and a labor market), show how this normal increase in population will tend to affect key

economic variables. Use your results to explain why we should NOT gauge the long run health of

the economy using the number of jobs created.

Answer 1

Increase in population labour market, label supply will shift rightwards and thus new equilibrium will occur at point E_2 where wages have declaimed . the increase in labour will increase the level of output produced in the economy. From Y_1 to y_2 . this will shift the long run aggregate supply curve of the economy rightward. And thus price level declined from p_1 and p_2.