Question

Suppose some friends you made on an international trip are thinking of moving to the United States. The number of immigrants living in the United States rose 16 percent in recent years (Census Bureau). At the same time, the U.S. population over 65 is increasing much faster than the percentage of the population under age 20. Use the model of AD-AS to explain the impact of (i) increased immigration and (ii) the aging of America on the economy (hint: what is shifting and in what direction? Also, it’s OK if there is no clear-cut prediction on the equilibrium outcome).

Answer 1

i) increased immigration means there is higher level of labor supply which increases aggregate supply shifting the AS rightwards to AS'. Also increase in population means increase in consumption spending which leads to rightward shift AD to AD'. At new equilibrium output has increased to Y' but effect on price is ambiguous as it depends on relative magnitudes in the shift of AD and AS.

ii) when Population under 20 is increasing at lower rate than population growth rate of people above 65, aggregate supply decreases due to decrease in labor supply. This shifts AS leftwards to AS'. At new equilibrium output has decreased to Y'and price level has increased to P'.

(ii)