Question

Assume that expectations of productivity growth adjust slowly over time. For this economy, a decrease in productivity will most likely cause which of the following to occur?

Select one:

a. A decrease in the markup over labour costs.

b. An increase in the natural rate of unemployment.

c. An increase in the markup over labour costs.

d. A decrease in the real wage.

e. A decrease in the natural rate of unemployment.

Answer 1

Answer :- Option 'b' is the correct Answer

For the given economy, it is assumed that the expectation of productivity growth adjust slowly over time then a decrease in productivity will most likely to cause an increase in the natural rate of unemployment.

Natural Rate of Unemployment means normal unemployment rate around which the actual employment rate fluctuates, arises from effects of frictional and structural unemployment.

factors such as changes in characteristics of labor force, changes in labor market institutions, changes in government policies, changes in productivity can cause a change in the natural rate of unemployment.

Changes in productivity can explain the changes in the natural rate of unemployment (an acceleration in productivity growth can translate to lower unemployment rates for a while, and vice versa).