43. (Problem 8) In Wageland, all workers sign an annual wage contract each year

Question

43. (Problem 8) In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. As Wageland moves from one short-run macroeconomic equilibrium to a new equilibrium: A. the level of aggregate output will decrease and the aggregate price level will fall. B. the level of aggregate output will increase and the aggregate price level will fall. C. the level of aggregate output will decrease and the aggregate price level will rise. D. the level of aggregate output will increase and the aggregate price level will rise. 43. (Problem 8) In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. As Wageland moves from one short-run macroeconomic equilibrium to a new equilibrium: A. the level of aggregate output will decrease and the aggregate price level will fall. B. the level of aggregate output will increase and the aggregate price level will fall. C. the level of aggregate output will decrease and the aggregate price level will rise. D. the level of aggregate output will increase and the aggregate price level will rise.

Explanation / Answer

The correct answer is B. If labour productivity rises then this will mean the aggregate supply will rise and so output will rise and prices will fall. The correct answer is thus B

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