Question

How would each of the following affect the current level of full-employment output? Explain and illustrate with a graph. a. War continues in the Middle East and a large number of immigrants move into Europe. b. Out of fear about global warming the US government bans all fossil fuels by 2022. c. The Chinese develop new genetic splicing that improve the IQ of all newborns by 25%. d. Instagram servers explode and without the constant leadership of self-made billionaire Kylie, the entire US economy goes into depression and stock prices dramatically fall reducing the wealth of most Americans.

Answer 1

Ans

1 will increase since labour force rises which shifts LRAS rightwards to LRAS1. Thus full employment output level rises

2 In other words real resources avaliable for use fall. Thus LRAS shifts leftwards to LRASo. Hence full employment output level falls

3 This increases output capity of economy and LRAC1 shifts rightwards to LRAC2

4 Aggregate demand falls shortrun output falls to Y but full employment level doesn't change