Potential income and the labour market - The classical labour market - Labour supply

6 important questions on Potential income and the labour market - The classical labour market - Labour supply

What is the difference between active population and the labour force?

The labour force are just the people in the active population willing to work

What does the labour supply curve depict?

The amount of labour supplied at given wage rates

How does the real wage rate w=W/P ork?

The real wage rate is money wage devided by price level
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What does perfectly flexible money wages imply in the classical labour market model?

That price level does not affect the market-clearing real wage and employment nor output

What property of the aggregate supply curve does the classical labour market model imply?

A vertical one

How do you find potential income from a labour market equilibrium?

Take the intersection of labour supply and demand in real wages
Find the point in the partial production function where the slope equals this real wage
The output at that point is the potential income

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