The fact that output gaps will not last indefinitely, but will be closed by rising or falling inflation is the economy's:

For a firm in the long-run, an increase in the market wage rate will cause it to reduce the employment of labor. With fewer workers, the firm's marginal revenue product for capital

a. shifts downward leading the firm to use less capital. b. shifts upward leading the firm to use more capital. c. twists so that is becomes more elastic d. is not affected.

Consider the accompanying diagram, which shows an investor who can choose to hold the risky assets on the efficient set and/or the risk-free asset labeled R.

(i) Describe the portfolio held by this investor.
(ii) Suppose the expected return of the risk-free asset increases. Complete the diagram to show how the investor responds to this change. Describe how the market portfolio changes, and describe the new portfolio held by the investor.
(iii) Assume that as the investor's income rises, he prefers that his portfolio have a higher expected return and a lower standard deviation. When the expected return of the risk-free asset rises, does the expected return of the investor's portfolio rise or fall? Does the standard deviation of the investor's portfolio rise or fall? Explain, using substitution and income effects.