Question 3

In class, we have always assumed that natural GDP is constant. Suppose that thanks to technological innovations, labor productivity increases. This is represented by the production function Y = AN where A > 0. The case covered in class corresponds to A = 1. 1. Analyze the effect on the labor market (the WS and PS curves) of an increase in A 2. What happens to the natural unemployment rate and natural GDP? 3. Using the AS-AD diagram, analyze the impact on the price level and short-term and medium-term GDP of an increase in productivity.