An economist needs to predict the real wage rate, employment, output, real interest rate, consumption, investment, and price level. The economy is hit with a shock, which the economist thinks is a temporary adverse supply shock.

(a) If you were the economist, what would be your forecasts for each of the variables listed above (rise, fall, and no change) in general equilibrium?

(b) What if the shock was due to people's reduced expectations about their future income? Which variables did you forecast correctly, and which did you forecast incorrectly in part (a)?

Answer rating: 100% (QA)

a Forecasts for Each Variable with a Temporary Adverse Supply Shock Real Wage Rate Likely to rise due to the decrease in the supply of goods and servi... View the full answer