In the two-sided search model, an increase in productivity causes
A)labour market tightness to fall and output to fall.
B)labour market tightness to rise and output to fall.
C)the vacancy rate to rise and the unemployment rate to fall.
D)output to fall and the vacancy rate to fall.
E)the vacancy rate and the unemployment rate to fall.

Question

Quizplus · Accepted Answer

In the two-sided search model, an increase in productivity leads to an increase in the number of vacancies, which causes the vacancy rate to rise. This, in turn, causes a reduction in the unemployment rate as more workers find jobs. An increase in productivity does not necessarily lead to a fall in output, so options A, B, and D are incorrect. Additionally, option E is incorrect as an increase in productivity will not necessarily lead to a reduction in both the vacancy and unemployment rates.

In the Two-Sided Search Model, an Increase in Productivity Causes