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...
In game theory, a strategy
A) is useless, because firms are subject to bounded rationality. B) is useful in static games, but not in dynamic games. C) defines the specific actions a firm will make. D) determines the payoff matrix of the game.
Prior to World War II, the international financial system had operated on
a. a floating exchange rate system b. a managed exchange rate system c. a laissez-faire exchange rate system d. the gold standard e. the dollar standard
The movement of workers from lower productivity jobs to higher productivity jobs would be an example of a(n):
What will be an ideal response?
GDP estimates account for which of the following items?
A. Do-it-yourself activities B. "Psychic income" people derive from their work C. Household spending for health and home insurance D. Improvements in product quality