Answer to Question #102898 in Macroeconomics for Ash Cinu

Question

Consider an economy that abides by the standard classical model specifications. Suppose policymakers reduce the retirement age, resulting in a large number of workers falling out of the labor force. Using graphs and written discussion, examine the economic dynamics in the wake of the shock. Capture the timing in your written discussion
• If a curve shifts, explain why/economic intuition
• If a market is in disequilibrium, explain how it returns to equilibrium • Explain, if possible, the final outcome in terms of important variables:
Y,N,P,C, W/P ,W,r,S,PuS,PrS,I

Answer 1

If policymakers reduce the retirement age, resulting in a large number of workers falling out of the labor force, then the aggregate supply will decrease, as a result the price level will increase, and the equilibrium output will decrease.