Midterm #3 Review

Midterm #3 Review - Review Problems on Chapter 9 Question 1...

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1 Review Problems on Chapter 9 Question 1 (a) Suppose now there is an increase in the labor force participation rate which increases the total supply of labor. Use the labor-market-equilibrium diagram to explain how this would affect the equilibrium level of employment and real wage. Suppose the labor market is in equilibrium initially (point E). The increase in labor supply is represented by a rightward shift in the NS curve. The labor demand curve (ND) is unaffected. The new equilibrium point is given by point F. The increase in total labor supply leads to a decline in the real wage rate and an increase in employment. (b) Use the production function that relates real output and employment to determine how an increase in the labor force participation rate would affect the full-employment level of real output. From the production function that relates output (Y) and employment (N), we can see that an increase in the equilibrium level of employment causes an increase in the full-employment level of output . F E NS 1 ND N real wage Labor Market Equilibrium NS 2 Y 2 * N 2 * Y 1 * N 1 * Employment Real output Production Function
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2 (c) Suppose the economy is in general equilibrium initially. Use the IS-LM-FE diagram to explain how an increase in the labor force participation rate would affect the real output, real interest rate and price level in three steps: (i) before the price level adjusts (ii) when the price level is adjusting (iii) after the price adjustment process is completed. State clearly whether the price level is increasing or decreasing during the price adjustment process. Suppose the economy is in general equilibrium before the change (point E). Before the price level adjusts, an increase in labor force participation rate shifts the FE line to the right. This is true because an increase in total labor supply raises the full-employment level of output (from Y 1 * to Y 2 *). The FE line and the IS curve now intersects at point F. The price level should decrease so that the
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This note was uploaded on 04/10/2008 for the course ECON 002 taught by Professor Mahalingam during the Spring '07 term at UC Riverside.

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Midterm #3 Review - Review Problems on Chapter 9 Question 1...

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