Question

6. The FE curve.

What does the FE curve represent?

What is the difference between a steeply sloped or shallowly sloped FE curve?

How would you interpret that?

If the economy is operating to the right of the FE curve, what does this mean?

What are two factors that will shift the FE curve?

Answer 1

Solution:

(a) The FE curve represents the equilibrium in labour market. When the labour market is in equilibrium, output is equal with full employment level and the FE curve is vertical.

(b) FE curve is a straight line. So, there is no steeply sloped or shallowly slopped FE curve.

(c) The point where LM and IS curve intersects is the equilibrium point and the line drawn vertically to the point is FE curve.

(d) If the economy is operating to the right of the FE curve, it means that there is increase in the supply (LM curve).