Unformatted text preview: n the labor market is in
(long-run) equilibrium. Y=A0F(K0, L) YP YP = AF(K, L)
• The full-employment, or potential, output level
is also the economy’s long-run aggregate
3-32 8 Full-Employment Output Supply Shocks • Factors that change full-employment output: • Supply (or productivity) shocks occur if there
is a change in the amount of output that can be
produced with a given amount of capital and
labor. • Supply shocks can occur because of: 1. Shifts in the demand for labor and/or supply of
• These affect the full-employment level of employment. 2. Shifts in the production function. 1. Technology shocks • From supply (or productivity) shocks or changes in the
capital stock. 2. Natural environmental shocks combined to be changes in
the A term 3. Energy price shocks
3-33 3-34 total factor: its everything that affect economic output that are not
the direct contribution of??
draught can have negative effect on economic output even though
the quantity of labor and capital doesn't change.
like if oil price goes up, then you would change the way you
produce in order to conserve energy. Supply Shocks
• Supply Shocks: Y, K, the MPK and rc Supply shocks involve changes in A.
– rc, MPK Y These shocks rotate the production function.
Y0 • Y = A0F(K, L0) Supply shocks can be either:
1. Positive (or favorable or beneficial), which rotates
the production function up.
rc0 2. Negative (or unfavorable or adverse), which
rotates the production function down.
3-35 K MPK K K
3-36 9 Supply Shocks: Y, L, the MPL, and w Supply Shocks
• w, MPL Y
5. Y = A0F(K0, L) w0 L The production function to rotate higher,
The marginal product of capital to increase,
The real (rental) cost of capital to increase,
The marginal product of labor to increase, and
The real wage to increase. MPL •
L A positive supply shock causes: L A negative supply shock has opposite effects. L
3-37 3-38 10...
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