Question

Using an AS/AD diagram, demonstrate graphically and explain verbally the short run impact on the price level and real output of overall technological change.

Answer 1

A technological improvement can raise labor productivity. This is likely to raise the level of production. In the short run, there is an increase the real GDP and a decline in the price level as the goods market experiences a rightward shift of the aggregate supply curve (in the long run, the long run aggregate supply curve also shifts to the right and the short run equilibrium output after the technological improvement becomes the long run potential one).

A technological degradation can reduce labor productivity. In the short run, there is a decrease in the real GDP and an increase in the price level as the goods market experiences a leftward shift of the aggregate supply curve.