Suppose you were a forecaster of the real wage rate, employment, output, the real interest rate, consumption, investment, and the price level. A shock hits the economy, which you think is a temporary adverse supply shock
(a) What are your forecasts for each of the variables listed above (rise, fall, and no change)? (b) What if the shock was really due to people's reduced expectations about their future income. Which variables did you forecast correctly, and which did you forecast incorrectly?
(a) The real wage rate, employment, output, consumption, and investment decline, while the real interest rate and the price level rise.
(b) The IS curve shifts down and to the left, instead of the FE line shifting left, so you are wrong about every variable except consumption. The real wage, employment, and output won't change, the real interest rate and the price level will decline, and investment will rise.
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Two countries, Rhodia and Rubium, have identical production functions of the form:
Y = A × K0.25 × H0.75 Both countries have the same amount of capital stock and use the same technology. However, the total efficiency units of labor available in Rhodia is higher than that in Rubium. Which of the following is likely to be true in this case? A) The poverty rate in Rhodia is likely to be higher than that in Rubium. B) The gross domestic product of Rhodia is higher than that in Rubium. C) The gross domestic product of Rubium is higher than that in Rhodia. D) The Human Development Index of Rhodia is lower than that of Rubium.