Question

Long-run classical model from Chapter 3. You must provide properly labeled graphs to get full credit!!!!!!! 3) A) Suppose there is a permanent increase in the labor force (L). a) What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)

Answer 1

Below the classical model, economic growth is necessarily achieved because of stability in the wage level. For instance, one case of unemployment predominates at a real wage (W / P)1.

Currently, the excessive labor supply would lower the actual wage level before labor supply equals its demand. Eventually, real wage rates would decline to (W / P)F, whereby aggregate labor demand is perfectly matches by aggregate labor supply.

Only the supply side of the production market for products defines the quantity of output & jobs in the classical model.

As the classical method is supply-determined, it states that equiproportional increases (or declines) will not alter the supply of labor in both the rate of money wage and the price level.