Suppose an economy experiences a reduction in productivity. ...

[Destiiny22]

Suppose an economy experiences a reduction in productivity. Explain both the short-run and medium-run effects of this reduction in productivity on output, employment, and the unemployment rate.
 
  What will be an ideal response?

Question 2

Which of the following generally occurs when a central bank pursues contractionary monetary policy?
 
  A) the central bank purchases bonds and the interest rate increases.
  B) the central bank purchases bonds and the interest rate decreases.
  C) the central bank sells bonds and the interest rate increases.
  D) the central bank sells bonds and the interest rate decreases.

[Rilsmarie951]

Answer to Question 1

In both the short run and medium run, TP will cause a reduction in output (assuming, of course, that any change in AD, if it occurs, is offset by the shift in the AS curve). What happens to employment in the medium? Given that Y will fall by the full change in TP in the medium, we know that N and u will not be affected in the medium run. In the short run, N will fall and u will rise if the percentage change in Y is less than the percentage change in TP.

Answer to Question 2

C