A supply shock that reduces labor productivity
A)causes accelerating inflation if the Fed attempts to maintain the original output level.
B)will increase real wages if nominal wages are flexible.
C)will reduce the level of output at the natural level of real GDP even if employment does not decline.
D)A and C.

Question

Quizplus · Accepted Answer

A supply shock that reduces labor productivity will cause a decrease in output at the natural level of real GDP even if employment does not decline. If the Fed attempts to maintain the original output level, there will be accelerating inflation. Real wages will increase if nominal wages are flexible. Thus, both options A and C are correct.

A Supply Shock That Reduces Labor Productivity