For this question,assume that expectations of productivity are slow to adjust.Further assume that A had been increasing by 6% a year.Now suppose that A only increases by 2% in period t.This slowdown in productivity growth will cause
A)the PS relation to shift up more than the WS relation.
B)the WS relation to shift up more than the PS relation.
C)the natural rate of unemployment to fall.
D)the real wage to fall.

Question

Quizplus · Accepted Answer

The WS (Wage Setting) relation shifts up more than the PS (Price Setting) relation because the WS curve reflects workers' expectations about productivity and inflation. If workers expect high productivity growth (6%) and it slows down unexpectedly (to 2%), their wage demands based on previous higher expectations will cause the WS curve to shift up more than the PS curve, which is more directly tied to actual productivity changes. This misalignment increases the cost of labor for firms without a corresponding increase in productivity, leading to higher natural unemployment.

For This Question,assume That Expectations of Productivity Are Slow to Adjust.Further