Question

In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. Explain how Wageland will move from one short-run macroeconomic equilibrium to another. Illustrate with a diagram

Answer 1

Answer - In Wageland, worker sign annual contract each year on January 1. In late January, a new computer operating system increased labor productivity dramatically. The workers have made contract for one year already thus they cannot change it. As productivity increases aggregate supply curve in the economy will shift to the right. Productivity increase lowers the cost of production and increase profit of producers. Price level will fall in the economy. The economy will move from one short run equilibrium to another short run equilibrium due to shift in SRAS curve. After shift SRAS becomes SRAS1. In the diagram price level is shown on vertical axis and aggregate demand and supply are shown on horizontal axis.