3. Starting from short-run equilibrium, the following occurs: Labor productivity rises, and individuals expect higher (future) incomes. What will be the effects on the price level, Real GDP, and the unemployment rate in the short run?
a.Real GDP will fall, the unemployment rate will rise, and the price level will rise.
b.Real GDP will rise, the unemployment rate will fall, and the effect on the price level cannot be determined.
c.Real GDP will rise, the unemployment rate will fall, and the price level will fall.
d. Real GDP will fall, the unemployment rate will rise, and the effect on the price level cannot be determined.
e. Real GDP will rise, the unemployment rate will rise, and the price level will rise.
To determine the effects on the price level, Real GDP, and the unemployment rate, we need to consider the relationship between labor productivity, individuals' expectations of future incomes, and the short-run equilibrium.
When labor productivity rises, it means that workers are able to produce more output per hour of work. This increase in productivity can lead to an increase in Real GDP in the short run because more goods and services are being produced.
When individuals expect higher future incomes, it suggests that they anticipate an increase in their purchasing power and are likely to spend more. This increase in consumer spending can also lead to an increase in Real GDP in the short run.
The increase in Real GDP combined with higher expectations of future incomes can have an impact on the price level. As the demand for goods and services increases due to higher consumer spending, it may lead to upward pressure on prices, resulting in an increase in the price level.
Now let's analyze the effects on the unemployment rate. The rise in labor productivity implies that each worker can produce more output, which can lead to higher demand for workers in the short run. This increase in labor demand can result in a decrease in the unemployment rate.
Considering these factors, the most appropriate answer is:
b. Real GDP will rise, the unemployment rate will fall, and the effect on the price level cannot be determined.