Assume Expectations of Prices Are Correct but Expectations of Productivity

question 54

Essay

Assume expectations of prices are correct but expectations of productivity adjust slowly.Use the PS / WS relations,graphically illustrate and explain the effects of a decrease in productivity growth on the natural rate of unemployment.

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Definitions:

Excess Demand

A situation where the quantity demanded of a good exceeds the quantity supplied at a particular price, leading to a shortage.

Supply Function

A mathematical function that illustrates the quantity of a good that producers are willing and able to sell at different price levels.

Demand Function

A mathematical expression showing the relationship between the quantity demanded of a good and its price, along with other determinants of demand like income.

Quantity Tax

A tax levied on the quantity of goods sold, not on the value of sales.