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

Question

Quizplus · Accepted Answer

An increase in productivity will shift the bargaining power in favor of the firms, decreasing the wage rate and increasing the vacancy rate. This will increase market tightness, as there are more job vacancies available for job seekers. As a result, unemployment will decrease and aggregate output will increase.

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