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 of labor productivity rising and individuals expecting higher future incomes on the price level, real GDP, and the unemployment rate in the short run, we need to understand the relationship between these factors.
When labor productivity increases, it means that each worker can produce more output per hour. This leads to an increase in real GDP because more goods and services can be produced with the same amount of labor.
When individuals expect higher future incomes, it can lead to an increase in consumer spending. Higher consumer spending can also increase aggregate demand and result in an increase in real GDP.
The increase in real GDP and productivity can also lead to a decrease in the unemployment rate. As more goods and services are produced, businesses may need to hire additional workers to meet the increased demand.
Now, let's analyze the given options:
a. Real GDP will fall, the unemployment rate will rise, and the price level will rise.
The given option suggests that real GDP will fall, which contradicts the explanation provided above. Therefore, this option is incorrect.
b. Real GDP will rise, the unemployment rate will fall, and the effect on the price level cannot be determined.
This option aligns with our explanation. An increase in labor productivity and expectations of higher future incomes will lead to an increase in real GDP. It can also result in a decrease in the unemployment rate if businesses need to hire more workers. However, the effect on the price level cannot be determined solely based on the given information. Thus, this option is a possible correct answer.
c. Real GDP will rise, the unemployment rate will fall, and the price level will fall.
The given option suggests that the price level will fall, which does not align with the explanation provided above. Therefore, this option is incorrect.
d. Real GDP will fall, the unemployment rate will rise, and the effect on the price level cannot be determined.
This option suggests that both real GDP will fall and the unemployment rate will rise, which contradicts the explanation provided above. Therefore, this option is incorrect.
e. Real GDP will rise, the unemployment rate will rise, and the price level will rise.
The given option suggests that both the unemployment rate and the price level will rise, which contradicts the explanation provided above. Therefore, this option is incorrect.
Based on the analysis, option b is the most likely correct answer. It suggests that real GDP will rise, the unemployment rate will fall, and the effect on the price level cannot be determined.