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For this question, assume that expectations of productivity are slow to adjust. Further assume that A...

For this question, assume that expectations of productivity are slow to adjust. Further assume that A had been increasing by 2% a year. Now suppose that A increases by 5% in period t. This increase in productivity growth will cause

(a) the real wage to rise and no change in the natural rate of unemployment.

(b) the WS relation to shift up more than the PS relation.

(c) the natural rate of unemployment to fall.

(d) the real wage to fall.

(e) we don’t have enough information to answer

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Answer #1

If A which is productivity increases by 5 percent in period t, this increase in the productivity growth will cause,

a- the real wage to rise and no change in the natural rate of unemployment.

Productivity growth is also closely linked to the average level of wages. Over time, the amount that firms are willing to pay workers will depend on the value of the output those workers produce. If a few employers tried to pay their workers less than what those workers produced, then those workers would receive offers of higher wages from other profit-seeking employers.

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