Answer to Question #274997 in Macroeconomics for kika

Question

4. How would an increase in the supply of labor affect the natural level of employment and potential output? How would it affect the real wage, the level of real GDP, and the price level in the short run? How would it affect long-run aggregate supply? What kind of gaps would be created

Answer 1

Impact of increase in the supply of labour

 

An increase in the supply of labour leads to a fall in the wage rate from W1 to W1. Quantity increases from Q1 to Q2.

An increase in the supply of labor shifts the supply curve in Panel (a) to S ₂, and the natural level of employment rises to L ₂. The real wage falls to ω ₂.

Since the economy is at full employment and all workers are working, the level of inputs can't be increased further. Full employment GDP is also the maximum Long Run level of GDP that can be sustained with the present technology level