Question

Suppose a technological advance improves the production function (i.e. A↑). Please graph your solutions.

a) What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)?

b) What will be the impact on the long-run level of real GDP (Y)?

c) What will be the impact on private saving (Sprivate), public saving (Spub), national saving (S)

d) What is the impact on the equilibrium interest rate?

Answer 1

a) In the competitive market, the real wage is equal to the marginal product of labor and real rental price of capital is equal to the marginal product of capital. If the technology advancement is not specifically favoring labor or capital, then the marginal product will not change and so will the wage rate and rental rate.

b) Because the technology improvement will lead to increase in production, it will increase the long term level of GDP.

c) if the real GDP increases, keeping the savings rate constant, the national saving will increase. If the wages increase then the private saving will also increase

d) since savings will increase, saving curve will shift to the right and interest rate will decrease