Assume that expectations of P and A are correct. Now suppose that there is a 4% decrease in A. Given this information, which of the following will occur?
A) The WS relation will shift down by 4%.
B) The WS relation will shift down by more than 4%.
C) The PS relation will shift down by less than 4%.
D) The PS relation will shift up by 4%.
E) The WS relation will shift down by less than 4%.

Question

Quizplus · Accepted Answer

The WS (Wage-Setting) relation will shift down by 4% if there is a 4% decrease in A, assuming that the expectations of P and A are correct. This is because the WS curve reflects how wages are set in relation to productivity and other factors, and a decrease in A (productivity or another relevant factor) directly leads to a proportional decrease in the wage-setting curve.

Assume That Expectations of P and a Are Correct