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

Note that when there is an immigration, labor force is increased and so average productivity is likely to increase and so LRAS and SRAS both are likely to rise in the near future. These curves would shift to the right. This will reduce price level and raise the output level.

However, when population is aging, this would reduce the labor force and so average productivity is likely to decrease and so LRAS and SRAS both are likely to fall in the near future. These curves would shift to the left. This will increase price level and reduce the output level. Hence overall it cannot be predicted what will be the final outcome since both events are negating each other.