Question

Labor & Loanable Funds Together

“real” side of the neoclassical model.

Suppose that there is an exogenous increase in productivity. (For now, that means that given amounts of labor and capital can produce more output.) Predict what will happen to

(1) real wages,

(2) total production,

(3) employment, and

(4) the real interest rate.

Answer 1

Real wage rate at the equilibrium is the marginal productivity of labour. An increase in the productivity will increase the real wage rate therefore.

Total production increases because the productivity of both labour and capital have increased.

There might be a increase in the number of workers employed because the productivity of each worker has increased so the firm might be demanding more labour to produce a given amount of output. Real interest rate will increase as the demand for funds by industries will increase.