AP Macro Problem Set #3

# D assume that this country produces two goods x and y

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d. Assume that this country produces two goods, X and Y. Draw a correctly labeled production possibilities curve for this economy. Now show on the graph how this decrease in corporate profits taxes will affect this economy’s production possibilities curve. 2. Explain how each of the following will affect long-run aggregate supply (potential real gross domestic product.) a. A decrease in the labor force participation rate i. Would shift the LRAS to the left because of a decrease in the labor force participation rate which reduces the supply of labor and causing an increase in wages resulting in a reduction of employment. The lower level of employment in the economy causes the economy to not produce at its best resulting in the GDP falling. b. An increase in the government deficit following a reduction in personal income taxes i. Would cause the LRAS to decrease because an increase in the government deficit following a reduction in personal income taxes would increase in the demand for loanable funds as well as interest rates thus decreasing investment which causes a decrease capital stock and GDP. c. A decrease in quantity of inputs required to produce a unit of output

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i. Would cause the LRAS to increase because the productivity levels are increase due to the fact that it costs less to product one unit of output therefore the companies can product more for a cheaper amount. As a result the GDP goes up because more goods are being produce for a cheaper price therefore more people are willing to buy the product which boosts the economy. d. An increase in the quantity and quality of education i. Would cause the LRAS to increase because an increase in the quantity and quality of education means there’s an increase investment in human capital which leads to an increase in productivity in the labor force resulting in an increase in the GDP. e. An increase in the rate of savings i. Would cause the LRAS to increase because the increase in savings will cause an increase in investment which then would result in an increase in capital stock therefore increase the GDP. 3. Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth. a.Identify two sources of increase in labor productivityi.Increase in quality/quantity of resources and an improvement/innovation of technology b. Assume that a country’s economy is at full employment. Productivity has been rising. Using a correctly labeled graph of aggregate demand and aggregate supply, show the long-run effect of the growth in productivity on each of the following. i. Real Output 1. With a country’s economy at full employment, productivity will increase because more people are working to produce more goods/products which will increase the real output. ii. Price level 1. As a result of companies/businesses producing more they are able to lower prices level because they can produce more product at a cheaper price. c. Assume that the economy produces only two goods, good X and Y. Using a correctly labeled production possibility diagram, show the effect of the increase in labor productivity.

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