Question

When labor productivity​ increases, there is​ _____ the production function and​ _____ in potential GDP.

A.a movement up​ along; an increase
B.a movement up​ along; no change
C.an upward shift​ of; an increase
D.an upward shift​ of; no change

Answer 1

When labor productivity increases, the production function shifts upward, leading to an increase in potential GDP. This also results in a rightward shift of the labor demand curve, potentially causing temporary low unemployment.

Step-by-step explanation:

When labor productivity increases, there is an upward shift of the production function and an increase in potential GDP. This change is reflected in economic models where the aggregate supply (AS) curve shifts to the right due to improved productivity, which allows firms to produce a greater quantity of output at every price level. In the context of labor markets, an increase in productivity shifts the demand for labor out to the right, resulting in higher demand for labor without an immediate increase in wages, which can lead to very low unemployment levels for a time.