1. A sharp decrease in housing prices makes people much less wealthy. If the pri
ID: 1248501 • Letter: 1
Question
1. A sharp decrease in housing prices makes people much less wealthy. If the primary effect of this decreased wealth is felt on labor supply, what happens to the level of employment and the real wage rate if the labor supply function is positively related to the real wage?a. Both employment and the real wage rate would increase.
b. Both employment and the real wage rate would decrease.
c. Employment would increase and the real wage rate would decrease.
d. Employment would decrease and the real wage rate would increase.
Explanation / Answer
1. A sharp decrease in housing prices makes people much less wealthy. If the primary effect of this decreased wealth is felt on labor supply, what happens to the level of employment and the real wage rate if the labor supply function is positively related to the real wage?b. Both employment and the real wage rate would decrease.
When consumers wealth changes. i.e, if the land prices fall or if, the stock market crumbles. Than the consumer’s wealth decreases, this is called reverse wealth effect. When this happens consumer has less income at his disposal and decreases his consumption spending resulting a shift in the AD curve towards its left.
This reduced demand for output shifts the demand for labor towards its left, decreasing wage rate and employment.
Labor demand shifters: change in product demand, change in productivity, change in price of another resource.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.