Question

Use table:

1. If the labor force participation increases, explain how employment, the real wage rate, and potential GDP change.

Production function			Labor market
Labor hours (millions)	Real GDP (millions of 2009 dollars)		Real wage rate (dollars per hour)	Quantity of labor demanded	Quantity of labor supplied
0	0			(millions of hours per year)
1	10		10	1	5
2	19		9	2	4
3	27		8	3	3
4	34		7	4	2
5	40		6	5	1

Answer 1

With the rise in labor force participation rate, the supply of labor increases because more people are now willing to do job. This rise in supply of labor will shift the upward sloping labor supply curve rightward and therefore will cause a fall in the real wage rate and rise in equilibrium level of employment.

Now, with rise in equilibrium level of employment, the long run aggregate supply curve will also shift rightward and the potential GDP of the economy will rise.

Conclusion:

1. Employment will rise.

2. Real wage rate will decline.

3. Potential GDP will rise.