22% O 00-51:57 A sudden decrease in the availability of skilled labor will reduc

Question

22% O 00-51:57 A sudden decrease in the availability of skilled labor will reduce the marginal productivity of capital that required those specific skilled workers. Suppose that this scenario happens in the renewable energy industry in Michigan, and that many individuals who worked in this industry have now decided to move to a different state, such as Texas, because of better job prospects there At the same time, households in Michigan experience a drop in income due to a recession in the state In the figure below, depict both of these changes-that is, the decrease in the marginal productivity of physical capital and the fall in income due to a recession-by shifting a curve or curves To refer to the graphing tutorial for this question type, please click here Interest tate K15/30

Explanation / Answer

The above graph talks about the IS framework.

The IS curve i.e. the investment savings curve is the locus of all the points where the goods market is in equilibrium.

In the above diagram S1 is the savings curve which has a positive relation with interest rate. This is because as interest rates increase , people are going to save as they will be rewarded with more returns and invest less.

The d1 curve shows the investments. It has an inverse relationship with interest rates as at lower interest rates , investors have to pay a lower interest adn therefore they invest more.

Coming to the question at hand.

Case1 : The marginal productivitty of physical capital falls.

This will cause a loss of output and supply in the economy will fall. Therefore the manufacturer reduces the investment and the investment curve shift leftwards to d11

Case 2 : Income falls due to recession

When income of the people fall, so do the savings as generally they are not willing to reduce the consumption, as a result the saving curve also shifts to the left to s11.

as the result the equilibrium point will shift from A to A1 where The Interest rate falls and so do savings and investments. How ever the changes in savings and investment may remain unchanged depending upon the degree to which income and productivity fall.

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