Suppose workers' and firms' expectations of the price level and productivity are accurate.In this case,a reduction in productivity will cause which of the following?
A)a decrease in both the real wage and the natural rate of unemployment
B)an increase in both the real wage and the natural rate of unemployment
C)a decrease in the real wage and no change in the natural rate of unemployment
D)an increase in the real wage and a decrease in the natural rate of unemployment
E) none of the above

Question

Quizplus · Accepted Answer

A reduction in productivity typically leads to a decrease in the real wage as firms adjust wages downward to reflect lower productivity. However, the natural rate of unemployment is determined by structural factors and not by short-term productivity changes, so it remains unchanged.

Suppose Workers' and Firms' Expectations of the Price Level and Productivity