Technological progress increases labour productivity and living standards in the long run.

a. Start from a labour market equilibrium and illustrate using a figure what happens to the price-setting curve when labour productivity increases. Explain also what happens to the long run real wage and unemployment rate. Illustrate this in a figure and explain what happens and why.

b. Now think about the short run adjustment process. Again using a figure, explain how the economy adjusts from the initial equilibrium to the new long run equilibrium. What are the key issues that affect the smoothness of the adjustment process?

c. Imagine country A that has a well-functioning competition authority making sure that firm entry is easy. Imagine another country B where the competition authority is not doing its job and where firm entry is much more difficult. In which country do think the adjustment process is smoother? Why?