6. Suppose that due to technological progress labour requirement per unit
of output is halved in a Simple Keynesian model where output is proportional
to the level of employment. What happens to the equilibrium
level of output and the equilibrium level of employment in this case?
Consider a modified Keynesian model where consumption expenditure
is proportional to labour income and wage-rate is given. Does technological
progress produce a different effect on the equilibrium level of
output in this case?
what i thought is due to technological progress aggregate supply increases , ad unchanged implies more employment and more output
in the case of modified Keynesian model due to multilier effect even more employment and more output then in 1st case
am i correct? , i know i m not but tell me where
or any different thought
I think there are two parts to the question.
As you pointed out, due to technological improvement AS will shift right...so Y will increase P will decrease.
Due to short-run trade-off between inflation and unemployment, unemployment should increase.
other way to see this is due to fall in prices real wage W/P increased (as W is sticky) which decreases labor demand by firms. So employment decreases.
Thats my take in the first part.
2nd part I am still struggling to put in an equation format.
In the first case, shouldn't the production curve shift upwards such that at the same level of employment, the total output increases. It leads to the rise in income but no change in anything else....
In the second case, the AD shifts leading to the multiplier effect increase in the level of output and employment and a rise in prices too.
Kindly let me know if it lacks somewhere in reasoning !