Question

using the simple macroeconomic model, show how a decrease in productivity affects the economy. In response to a decrease in productivity will total hours of work rise or fall? why?

Answer 1

The decrease in productivity is the leftward shift in the aggregate supply curve as shown in the above diagram, the shift is shown by AS to AS1. This inturn raises the price level in the economy and reduces the output in the economy.

Decrease in the productivity is associated with rise in the total hours of work. This is becuase when the employees overwork the cost per unit also increase this leads to a decrease in the productivity. When they work more the expenses also increase this is the reason for less prooductivity