Provide an economic explanation, Microeconomics

Assignment Help:

Provide an economic explanation of what you have shown in your diagrams above. Discuss what happens to Iceland's (1) level of economic output, (2) employment, (3) real wage rate, and (4) real rental cost of capital. Be sure to explain why this takes place.

A major financial crisis is a supply shock, a decrease in total factor productivity from A0 to A1. This can be represented by a downward rotation of the production function from Y = A0*F(K0, L) to Y = A1*F(K0, L).

As a result of the downward rotation of the production function from Y = A0*F(K0, L) to Y = A1*F(K0, L) the slope of the production function, which is the marginal product of labor, has declined. A decline in the marginal product of labor is also a decrease in the demand for labor at any given real wage rate. This can be represented by a leftward shift of the demand for labor curve from LD0 to LD1.

The major financial crisis also led to a sharp decline in expected future income. As a result of the decline in expected future income the supply of labor would increase for any given real wage rate. This can be represented by a rightward shift of the supply of labor curve from LS0 to LS1.

As a result of the decrease in the demand for labor and the increase in the supply of labor, the real wage will fall. Labor market equilibrium will be re-established at the intersection of the supply of labor curve, LS1, and the demand for labor curve, LD1, once the real wage has fallen from w0 to w1. At w1, the quantity of labor demanded is again exactly equal to the quantity of labor supplied. Equilibrium employment has declined from L0 to L1.

The lower equilibrium employment would have reduced the marginal product of capital, decreasing the demand for capital and reducing the real cost of capital.

The decline in equilibrium employment from L0 to L1 reduces the equilibrium level of economic output from Y0 to Y1 along the new, lower production function Y = A1*F(K0, L).

Once general equilibrium has been re-established, Iceland's (1) equilibrium economic output would have been reduced from Y0 to Y1, (2) equilibrium employment would have been reduced from L0 to L1, (3) the equilibrium real wage would have been reduced from w0 to w1, and (4) the real rental cost of capital would have declined.


Related Discussions:- Provide an economic explanation

Future worth, I need help finding the future worth given the initial invest...

I need help finding the future worth given the initial investment, MARR, and profit over a period of time.

Definition of labour force, Q. Definition of labour force? Labour Force...

Q. Definition of labour force? Labour Force:Total population of working-age people who are willing and able to work and who thus have ‘entered' labour market. Labour force incl

Opportunity cost, there are 1 million hours of labor available for making c...

there are 1 million hours of labor available for making cars in the north, and another 1 million hours of labor available for making cars in the south. in a no-trade world, let''s

Determine the wage contract , Assume that the employer (principle) wants it...

Assume that the employer (principle) wants its employee (agent) to work hard [You can safely assume that this maximizes the principle's expected profits from his business]. There a

What defines the fact that the value of global production, What defines the...

What defines the fact that the value of global production has grown by a factor of 4.6, while the value of global production per capita has grown by a factor of 2? The enhance

What is meant by own price elasticity of demand, Problem: i) What is me...

Problem: i) What is meant by ‘own' price elasticity of demand? What factors are likely to affect the size of this elasticity? ii) A publicly owned bus line is running at

#title.micro, what are jobs of the department of justice and the federal tr...

what are jobs of the department of justice and the federal trade commission in business pratices.

Aggregate demand and aggregate supply, In a small rural town, 150 people wo...

In a small rural town, 150 people would like to be employed (this is the supply of labor). In order to make profits, capitalists hire some of these workers to produce grain. Those

Explain decision-making and characteristics of speculative, Consumers purch...

Consumers purchase a house or multiple dwellings for a number of reasons. But what is the rationale behind their decision to buy and/or sell a house, flat or apartment? Do consumer

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd