Question

In the model with uncertainty and with capital, in an expectations-driven business cycle, labour productivity will be

Question 16 options:

	constant.
	countercyclical.
	acyclical.
	procyclical.

Answer 1

According to the expectations-driven business cycle, people make changes in their current and future decision that is based on the information provided in the market and future expectations. It is given that there is uncertainty in the market with the availability of capital, labor supply will be affected by future expectations. If workers expects increased wages in the near future, they will supply lesser labor today that reduces the productivity of the workers today. As a result, this decrease in productivity will result in lower value of workers in the market and producers perfer to use more capital. As a result, wage rate of these workers will decease ,which is opposite of the future expectations. As a result, labor productivity is​​​ countercyclical.

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