Question

When the economy is in equilibrium if the supply of labor increases then what will happen to the output, the rental price of capital and the real wage rate? Will they increase decrease or stay the same?

If the government increases expenditures what happens to equilibrium level of output and the real wage rate? Do they increase, decrease or stay the same?

Answer 1

When the supply of the labor increases, the output level of the economy will increase mainly due to the increase in the total productivity due to the induction of additional manpower in the workforce. While on the other hand, due to increased availability of labors and due to same demand of the labor, the real wage rates will come down.

When there is an increase in the government expenditure, the equilibrium level of output would increase and the real wage rates will increase due to the activities of government requiring more labor.