When the unemployment rate is on the horizontal axis and the real wage is on the vertical axis,a reduction in productivity will cause which of the following to occur?
A)The wage-setting and price-setting curves will both shift downward.
B)The wage-setting and price-setting curves will both shift upward.
C)The price-setting curve to shift downward, and no shift in the wage-setting curve.
D)The wage-setting curve to shift upward, and the price-setting curve to shift downward.
E) The wage-setting curve to shift downward, and the price-setting curve to shift upward.

Question

Quizplus · Accepted Answer

A reduction in productivity will lead to a decrease in the marginal product of labor and thus a decrease in the real wage at any given level of unemployment. This will cause the wage-setting curve to shift downward. At the same time, a decrease in productivity will also lead to a decrease in aggregate supply and shift the price-setting curve downward. Therefore, both the wage-setting and price-setting curves will shift downward.

When the Unemployment Rate Is on the Horizontal Axis and the Real