Question

According to the long-run classical model, there will be a rise in real rental price of capital and a fall in real wage when the economy experiences an improvement in production technology and a fall in capital stock at the same time. True/False/Uncertain, explain with the aid of the rental market for capital and labour market diagrams.

Answer 1

True. In long run classical model supply curve is always vertical assuming that real GDP is at its full employment level and only price changes in the economy.

When there is increase in production technology, goods can be produced in very less time and efficiently which increase the demand of product in the market. When there is technological improvement in the economy and less capital stock offered, it means that firms/companies are getting sufficient revenue/profits in the form of higher demand in the market.

When the price level is risen in the market, your consuming power declines which results in decline of real wages.

When demand increase in the market from D to D1 and supply at its vertical constant level and the output is at Q*.

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