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A rise in physical capital can raise Real GDP and lead to a rightward shift in the LRAS curve. Show this relationship diagrammatically.
Macroeconomics
Macroeconomics
A rise in physical capital can raise Real GDP and lead to a rightward shift in the LRAS curve. Show this relationship diagrammatically.
Relationship between production function and the long run aggregate supply curve (LRAS) curve.
Explanation of Solution
Figure 1 shows the shift of production function and thereby shift in the LRAS curve.
Figure 1
In Panel (a), the horizontal axis indicates the number of labors and the vertical axis indicates the real GDP. Production function shows the output or real GDP, which depends on inputs such as labor (L), capital (K), and technological coefficient. At ‘L1’ level of labor, the output produced by the firm is ‘Q1’. The technological coefficient of the production function is 0...
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