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QUESTION 3:

USE GRAPH, IF APPLICABLE, AS MUCH AS YOU CAN.

a) Consider the basic representations of the Multiplier, WS-PS and PC models as analysed this term. All possible outcomes for this question are listed below:

Outcomes:

1: The AD curve shifts upwards.

2: The AD curve shifts downwards.

3: There is an increase in real GDP.

4: There is a decrease in real GDP.

5: There is an increase in unemployment.

6: There is a decrease in unemployment.

7: The Phillips curve shifts upwards over time.

8: The Phillips curve shifts downwards over time.

9: The PS curve shifts upwards.

10: The PS curve shifts downwards.

11: The price level increasesat a constant rate (=0) over time. 12: The price level increasesat an increasing rate (>0) over time. 13: The price level falls (<0) over time.

For each market change specified below ((i) and (ii)), illustrate how these will affect the economy over time. Then, redraw (or copy) the table that follows into your answer script, andmark a 'Y' for 'Yes' or an 'N' for 'No'next to each specified change that explains the abovementioned outcomes. Fill in all the cells with either a Y or an N. [14]

b) The UK economy has struggled with low levels of productivity as well as rising levels of income inequality over the last two decades. One of government'skey priority areasis to 'level up' the economyby focusing on, inter alia, boosting productivity levels and employment in low-income areas. Assume the government has managed to increase labour productivity in low-income areas through focussed research and development and technological innovation incentives.

(i) Using the labour market model, show (and discuss) how an increase in labour productivity can boost wages and employment in low-income areas. In your analysis, differentiate between the short-run and long-run effects of this increase, and how inequality can be effected in the long-run. [6]

(ii) Discuss the main factors that can affect the length of time it takes for the economy to adjust to the long-run equilibrium, after the initial increase in labour productivity. [4]