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Ya0fk0 l yp yp afk l the full employment or potential

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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 supply, LRAS. L 3-31 L 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 labor. • 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. K 3-35 K MPK K K 3-36 9 Supply Shocks: Y, L, the MPL, and w Supply Shocks • w, MPL Y Y0 1. 2. 3. 4. 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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