Discuss the aggregate production function. How does the aggregate production function relate to the labor market and potential GDP?
What will be an ideal response?
The aggregate production function shows the maximum amounts of real GDP that can be produced as the quantity of labor changes, holding constant all other influences on aggregate production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the aggregate production function shows diminishing returns. The aggregate production function "stands between" the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The aggregate production function then shows the amount of real GDP that is produced by this quantity of employment. When the quantity of employment determined in the labor market is the equilibrium quantity, then the amount of real GDP produced is potential GDP.
You might also like to view...
A countercyclical variable ________
A) moves up during expansions and down during contractions B) is another term for an acyclical variable C) moves in the same direction as aggregate economic activity D) all of the above E) none of the above
A monopsony has an upward sloping supply curve because
A) diminishing marginal product to scale does not exist in a monopsony. B) each additional unit of labor costs less. C) when more units of labor are hired, all laborers must receive the higher wage. D) when more units of labor are hired, only the new workers receive the higher wage.