For this question,assume expectations of P and A are correct.Now suppose that there is a 3% reduction in A.Given this information,which of the following will occur?
A)The PS relation will shift up by 2%.
B)The WS relation will shift down by less than 2%.
C)The WS relation will shift down by 2%.
D)There will be no change in the real wage.

Question

Quizplus · Accepted Answer

A 3% reduction in A will cause a shift in the WS relation downwards by the same percentage. This implies that the real wage will decrease by 3%, reducing the wage bill for firms. As a result, the WS relation will shift down by 2%, because the full impact of the decrease in A will be spread over both wages and employment. Therefore, the right answer is (C).

For This Question,assume Expectations of P and a Are Correct