Based on the business cycle facts studied in class, what would you expect to happen to the following macroeconomic variables during the next few quarters if you knew that the economy was falling into a recession? Select one: a. Investment decreases, average labor productivity increases, real wage decreases, unemployment rate increases. b. Investment decreases, average labor productivity decreases, real wage decreases, unemployment rate increases. c. Investment decreases, average labor productivity increases, real wage increases, unemployment rate increases. d. Investment increases, average labor productivity decreases, real wage increases, unemployment rate increases.
Question
Based on the business cycle facts studied in class, what would you expect to happen to the following macroeconomic variables during the next few quarters if you knew that the economy was falling into a recession? Select one:
a. Investment decreases, average labor productivity increases, real wage decreases, unemployment rate increases.
b. Investment decreases, average labor productivity decreases, real wage decreases, unemployment rate increases.
c. Investment decreases, average labor productivity increases, real wage increases, unemployment rate increases.
d. Investment increases, average labor productivity decreases, real wage increases, unemployment rate increases.
Solution
The correct answer is:
b. Investment decreases, average labor productivity decreases, real wage decreases, unemployment rate increases.
Here's why:
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Investment decreases: During a recession, businesses are less likely to invest in new projects or expansion due to uncertainty and lower expected returns.
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Average labor productivity decreases: With less investment in capital goods, workers have fewer tools and equipment at their disposal, which can lead to a decrease in labor productivity.
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Real wage decreases: In a recession, there is often a surplus of workers due to layoffs and job losses. This increased supply of labor can put downward pressure on wages.
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Unemployment rate increases: A recession is characterized by a decrease in economic activity, which often leads to job losses and an increase in the unemployment rate.
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