a) The economy is beginning at equilibrium. There is an increase in labour productivity with no connected increase in wages for workers. Assume that the price level is flexible downwards as well as upwards. What happens to the price level and RGDP as a result? Label the original point (A) and the new point after the shift as (B).
b) Now, assume that at the same time there is an increase in Government spending which results in a change in AD which matches the initial change in SRAS. Graph this scenario and demonstrate what happens to the price level and RGDP.
c) Is this level of RGDP sustainable? Explain. How can it be sustained in the Long Run?