In the two-sided search model, the equilibrium effects of an increase in productivity are to
A) increase market tightness, decrease unemployment, and increase aggregate output.
B) decrease market tightness, decrease unemployment, and increase aggregate output.
C) decrease market tightness, decrease unemployment, and decrease aggregate output.
D) increase market tightness, increase unemployment, and decrease aggregate output.
E) increase market tightness, increases unemployment, and increases aggregate output.

Question

Quizplus · Accepted Answer

An increase in productivity in the two-sided search model leads to an increase in the number of job vacancies and a decrease in the number of unemployed workers. This leads to an increase in market tightness (i.e. the ratio of vacancies to unemployed workers), which leads to a decrease in the duration of unemployment and an increase in the number of filled jobs. This, in turn, increases aggregate output. Therefore, option A correctly explains the equilibrium effects of an increase in productivity.

In the Two-Sided Search Model, the Equilibrium Effects of an Increase