Answer to Question #95233 in Macroeconomics for komal

Question

8. Suppose that, due for example to reconstruction after a war, the capital stock of a nation increases. Use the graphical framework of F igure 3 -4 to illustrate the effect that the increase in the capital stock would have on output, employment, and the real wage in the classical model.

Answer 1

In classical model, capital output is determined by employment of labour. The level of output establish in the employment market by supply and demand of labour. When capital stock increases the level of labour supply will increase and labour demand will decrease. MC of employment is equal to the money wage divided by marginal product of labour. Equilibrium level of employment and real wage rate are indicated at the point in where the positive slopping labour supply curve cuts the negative sloping labour demand. In this case where there is an increase in capital stock the supply of labour will increase and this will raise the wages .