Suppose an economy experiences an increase in productivity. ...

[madam-professor]

Suppose an economy experiences an increase in productivity. Explain both the short-run and medium-run effects of this increase in productivity on output, employment, and the unemployment rate.
 
  What will be an ideal response?

Question 2

Graphically illustrate and explain what effect an increase in real income will have on the money market.
 
  What will be an ideal response?

[Brummell1998]

Answer to Question 1

In both the short run and medium run, TP will cause an increase in output (assuming, of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What happens to employment in the medium? Given that Y will rise by the full change in TP in the medium, we know that N and u will not be affected in the medium run. In the short run, N will rise and u will fall if the percentage change in Y is greater than the percentage change in TP.

Answer to Question 2

An increase in income will cause an increase in transactions and an increase in money demand. The money demand curve will shift to the right causing an excess demand for money and excess demand for bonds. The interest rate will rise to restore money market equilibrium. There is no change in money supply as a result of this.

[madam-professor]

Thank you

[Brummell1998]

Happy to help you