2. Production function and economic growth The production function of a hypothet
ID: 1151566 • Letter: 2
Question
2. Production function and economic growth
The production function of a hypothetical economy is:
Q = T (L, K)
The Q stands for real GDP; the T stands for the technology coefficient; the L stands for labor, and the K stands for capital. The graphical representation of this production function is given as follows.
***Detailed Explanation for F U L L points***
2. Production function and economic growth The production function of a hypothetical economy is: Q T (L, K) The Q stands for real GDP; the T stands for the technology coefficient; the L stands for labor, and the K stands for capital. The graphical representation of this production function is given as follows. 02 LABOR (L) Suppose that the economy is currently at Point A, where: Q1-0.5 (4, 5) Now suppose the economy moves to Point B on the graph. Which of the following expressions is most likely to represent the new real GDP? Q2 = 0.5 (5, 5) Q2 = 0.5 (3, 5) Q2 = 0.5 (4, 6) 2-0.5 (4,4)Explanation / Answer
Moving from point A to point B doesn not change the amount of labor employmnet in the economy. But the real GDP increases and this can happen because the amount of capital K available to the employed labor increases which increases their productivity and thereby increases real GDP. Hence, real GDP at point B can be described as Q2=0.5 (4,6). This change can be brought about by a fall in interest rates which increases investment and thereby increases the capital stock K in the economy.
An increase in capital stock of the economy that shifted the production function upwards implies that the productive capacity of the economy has increased and it can produce more output at all price levels given the same level of employment. This implies that the LRAS curve shifts rightwards as at any price level the real GDP of the economy has increased.
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