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5. Let the economy's production function be

Y=A f(N, K)

where

\mathrm{Y}

is...

Jun 10, 2024

Solution by Steps

step 1

Draw the 2D line plot with axes labeled "Y" (real GDP) and "N" (population)

step 2

Plot the curve starting from the origin and increasing as N increases, gradually flattening out

step 3

Identify the Malthusian equilibrium where the curve intersects the line representing subsistence level

step 4

Mark this intersection point as the Malthusian equilibrium output and population

Part a.ii

step 1

Draw the initial curve and Malthusian equilibrium as in part a.i

step 2

Show an increase in population by shifting the curve to the right

step 3

Identify the new intersection point of the curve with the subsistence level line

step 4

Mark this new intersection point as the new Malthusian equilibrium output and population

step 5

Explain that the economy reaches the new equilibrium due to increased population leading to higher labor supply, which initially increases output but eventually returns to subsistence level due to diminishing returns

Part b.i

step 1

Draw an Aggregate Supply (AS) - Aggregate Demand (AD) diagram with price level on the vertical axis and real GDP on the horizontal axis

step 2

Show the initial equilibrium where AS and AD intersect

step 3

Shift the AS curve to the right to represent an improvement in technology

step 4

Identify the new equilibrium with a lower general price level and higher real GDP

Part b.ii

step 1

Explain that the central bank can use contractionary monetary policy to reduce the money supply

step 2

This will shift the AD curve to the left, increasing the interest rates and reducing spending

step 3

Show the new intersection of AS and AD at the original price level but with lower real GDP

step 4

Conclude that the central bank's actions restore the original price level

Answer

The Malthusian equilibrium output and population are shown at the intersection of the production function curve and the subsistence level line. Immigration increases population, shifting the curve right, leading to a new equilibrium. Improved technology shifts the AS curve right, lowering the price level. The central bank can use contractionary policy to restore the original price level.

Key Concept

Malthusian equilibrium and Aggregate Supply-Demand analysis

Explanation

The Malthusian equilibrium is where population growth balances with subsistence level output. Technological improvements shift the AS curve, affecting price levels, which can be countered by central bank policies.