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marginal product theory

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In each of the following scenarios, predict what will happen to:
1) Employment, 2) real wages, 3) output, 4) the interest rate, and 5) the price level

1) There is a sudden decrease in consumption due to a decline in consumer confidence.
2) There is an increase in productivity (in the sense that each worker can now produce more, given the same capital stock).

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Solution Preview

1) In case of a sudden decrease in consumption (C), the aggregate output (Y) will be reduced, according to the GDP formula:
Y = C + I + G
As the aggregate demand decline with the desired consumption, there is less money demanded in the market. therefore, the interest rate will drop.
The drop in Y will ...

Solution Summary

An increase in productivity is inferred.