In the DMP model,the equilibrium effects of an increase in productivity are to
A) increase market tightness, decrease unemployment, and increase aggegate 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

According to the DMP model, an increase in productivity will lead to firms demanding more labor, thereby increasing market tightness (the measure of labor market efficiency). As market tightness increases, unemployment decreases. At the same time, increased productivity leads to an increase in aggregate output as firms produce more goods and services with the same amount of input. Therefore, the equilibrium effects of an increase in productivity are to increase market tightness, decrease unemployment, and increase aggregate output.

In the DMP Model,the Equilibrium Effects of an Increase in Productivity