Consider an economy in long- run equilibrium where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed)is $200. Now suppose that, other things being equal, the productivity measure rises to $210. The effect of this change will be
A)an increase in this economy's potential output, and an adjustment back to its original level after factor prices have adjusted.
B)a rightward shift of the aggregate supply curve, and an adjustment back to Y*.
C)an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and aggregate supply curves.
D)an increase in this economy's potential output in the long run.
E)a rightward shift of the aggregate demand curve due to the increased wealth of the private sector.

Question

Quizplus · Accepted Answer

An increase in productivity means that more output is being produced per factor employed, which increases potential output in the long run. As a result, the economy can produce more goods and services without causing inflationary pressures. There is no need for factor prices to adjust, and there is no shift in aggregate demand.

Consider an Economy in Long- Run Equilibrium Where Factor Supply