Suppose your economy resides at long‐run potential output but concerns arise that the birth rate is...

Suppose your economy resides at long‐run potential output but concerns arise that the birth rate is too low to support retired workers on fixed social security payments. Suppose further that technology growth is insignificant. If population is allowed to rise through immigration, what happens to the long‐run aggregate supply curve, prices and interest rates? What could happen to the LR supply curve, prices and interest rates if immigration remained restricted?

Expert Solution

If population is allowed to rise through immigration, what happens to the long‐run aggregate supply curve, prices and interest rates?

Since birth rate in country is not enough to offset the losses suffered by the aging population, Hence government must allow for immigration. Immigration would lead to the significant rise in output level thereby supply curve will shift to right. Prices are likely to fall due to increase in supply of goods and services. While demand for more fund may lead to the rise in interest rate.

What could happen to the LR supply curve, prices and interest rates if immigration remained restricted?

Aging population is supposed to outstrip new birth rate. Thus population is likely to decline. Therefore, number of people working would decline. It would lead to fall in supply and supply curve will shift to left. Further, fall in supply will cause rise in price level. Less economic activities may cause fall in interest rate.

Rahul Sunny answered 2 years ago

Suppose your economy resides at long‐run potential output but concerns arise that the birth rate is...

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Suppose your economy resides at long‐run potential output but concerns arise that the birth rate is...

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