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Relation between Productivity Growth and Inflation

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Suppose worker productivity increased at the rate of 1.9% per year. If the labor force grew by 1.5% per year, what rate of increase in RGDP would be sustainable without increasing inflation pressures?

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Solution Summary

Inflation rises if the economy grows at more than the rate of labor productivity growth. This problem illustrates how fast the economy can grow without giving rise to inflationary pressures in the process.

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We generally say that output depends on the factors of production and define a production function that depends on the input factors. The input factors are land, labor, capital, and ...

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