The graph below shows the production function and the labor market. The labor market is currently in equilibrium at point A.

Suppose that total factor productivity decreases.
a. Show the effect on the real wage rate and on real GDP.
b. Now suppose that, at the same time, there is an increase in the labor force. Show the effect on the graphs, and explain your results.
c. Why is the effect on output different in these two cases?

Transcribed Image Text:

PF Y* Labor, L (billions of hours) DLabort Labor, L (billions of hours)