Quiz 3: Classical Macroeconomics I: Output and Employment

Business

An endogenous variable is a variable whose value is determined within or by the model whereas the value of an exogenous variable is determined by forces outside the model.The real wage,the level of labor,and output are endogenous in the classical model.Exogenous variables include labor supply,capital,and technology.

An increase in technology will shift the labor demand curve to the right,leading to an increase in the real wage and an increase in labor.The aggregate production function will shift upward because of the increase in technology,and there will also be a movement along the production function as the quantity of labor increases.Both of these factors will increase aggregate output.

It is assumed that additional labor is supplied at higher real wage rates.At a higher real wage rate,the price of leisure is greater in terms of foregone income.Along the labor demand curve,the real wage is equal to the marginal product of labor.Because of diminishing marginal returns,the marginal product of labor falls as the quantity of labor rises,so the real wage must also fall as the quantity of labor rises.