Author Question: On the diagram above, show the new steady-state capital-labor ratio that results from a decrease in ... (Read 68 times)

tnt_battle · **on:** Jun 30, 2018

On the diagram above, show the new steady-state capital-labor ratio that results from a decrease in the saving rate. Can you say what has happened to the equilibrium level of consumption per worker?

What will be an ideal response?

Question 2

Consider the impact of an increase in labor-enhancing technology within the classical model. Provide graphs to illustrate what happens to real wages, labor, output, and the price level.

What will be an ideal response?

xthemafja · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

As saving/investment falls, the equilibrium capital-labor ratio declines along the depreciation line. As the capital-labor ratio falls, output-per-worker declines along the production function. Beginning from the original equilibrium k on the graph, the production function is clearly flatter than the depreciation line, so the decline in output is smaller than the decline in saving/investment, so that consumption per worker must be rising. Consumption per worker can fall only if k is so low that the slope of the production function (at that level of capital per worker) is steeper than the depreciation line.

Answer to Question 2

An increase in labor-enhancing technology will shift the production function upwards, which will increase labor demand and increase the real wage. This will increase the aggregate supply curve, which increases output and reduces the price level.