Answer to Question #210183 in Macroeconomics for Safia

Question

Starting from the initial equilibrium position again, suppose that the capital stock increases by 170. What 

will be the impact of this expansion on labour market equilibrium and aggregate supply of output? 

Calculate values of all endogenous variables and give intuitive explanation of the results.

Answer 1

The Capital stock increase will automatically raises the labour market equilibrium as wages will increase. At this point, labour market tend to adjust towards an equilibrium having higher wages and employment amount. Further, the increase in capital stock contributes to higher potential output level, hence aggregate supply of output shifting towards right.