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?
A) An increase in the natural rate of unemployment.
B) A decrease in the markup over labour costs.
C) An increase in the markup over labour costs.
D) A decrease in the natural rate of unemployment.
E) A decrease in the real wage.

Question

Quizplus · Accepted Answer

Since expectations of productivity growth adjust slowly, a decrease in productivity is likely to lead to a decrease in output and hence, an increase in the natural rate of unemployment. The decrease in productivity may also lead to an increase in the markup over labour costs, but it is not a certain outcome. The real wage may decrease, but it is not a necessary consequence.

Assume That Expectations of Productivity Growth Adjust Slowly Over Time