An increase in labor productivity will cause the FE line to
A)shift to the left.
B)intersect the IS curve at a higher real interest rate.
C)intersect the LM curve at a higher real interest rate.
D)become steeper.

Question

Quizplus · Accepted Answer

An increase in labor productivity will lead to a decrease in costs of production, leading to an increase in potential output. This will shift the FE line to the right. The intersection of the FE line and the LM curve determines the level of output and the real interest rate, and with an increase in potential output, the level of output will increase, leading to an increase in the equilibrium real interest rate determined by the LM curve.

An Increase in Labor Productivity Will Cause the FE Line