Answer to Question #196407 in Macroeconomics for sifiso magcina dla

Question

Use the AD-AS model to explain the impact of a general increase in productivity on the general price level and the level of real production and income in the economy

Answer 1

In an economy, the AD-AS model explains the condition of a goods market and the price and quantity of output of the market. 

Here, it is given that there is a general increase in productivity in the economy. It implies that the economy is able to produce more output with the given input resources and without incurring additional costs. As a result, aggregate supply will increase that will shift the As curve to the right, as shown in the graph below:

The rightward shift in AS curve will increase the real level of product and income, and decrease the price level in the economy.