Immigration and inflation: Suppose a large number of new immigrants enter the labor market. Assume this increase in the supply of labor provides a drag on wage increases: wages rise by less than the prevailing rate of inflation over the next year. Use the short-run model to explain how the economy responds to this change. Jones, Charles I.. Macroeconomics (Fourth Edition) (p. 343). W. W. Norton

See explanation below for answer.

Explanation:

When using the short run model, the capital stock is fixed and cannot adjust to changes in the demand for capital. We will be using the short run model to analyze the effect of immigration and inflation on the economy.

In an economy, the primary determinant of how immigration can affect wages and employment is the degree to which the workers who have newly arrived will replace or complement the existing workers.

The level of wages may drop in the short run for the kind of workers who can be easily replaced by immigrants, whereas the level of wages may rise for the workers whose expertise can be complemented by the new workers.

For instance, in a situation where foreign-born construction workers enter the labor market, thereby causing a decrease in construction workers’ wages. The firms will respond by employing more construction workers, and since additional first-line supervisors may be needed to supervise the activities of the expanded workforce, the demand and consequently, the wages of these complementary workers could increase.

Further, where the availability of low-skilled immigrants at lower wages allows businesses to expand, total employment will rise.

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