Question

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Suppose there is a permanent increase in the labor force (L)

What will be the impact on the long-run level of real GDP (Y)?

What will be the impact on private saving (Sprivate), public saving (Spub), national saving (S)

What is the impact on the equilibrium interest rate?

Answer 1

When there will be a permanent increase in the labor force, it will increase the rate of GDP growth due to increase in the productivity and also result in the increased aggregate demand.

When there is a permanent increase in the labor force its means the supply for the labor is high. When there is a high supply of labor and the demand remains the same. The wage rates will definitely reduce. This will make the disposable income towards the consumption reduce due to low income. Since consumption is the key factor, the consumers will save less and the rest of the income go to the consumption, hence the private, public and national savings will decrease.

Due to low income, there will be a high chance of borrowing so that they can facilitate other activities in their life since the income cannot less to undertake all those activities. An increase in demand for the loan-able funds increases the level of interest. Hence they borrow at high costs.