Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. What type of shock has occurred in the U.S. economy?

Question 2 options:

	A positive labor demand shock
	A negative labor demand shock
	A positive labor supply shock
	A negative labor supply shock

Question 3 (2.5 points)

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the equilibrium real wage rate and quantity of labor?

Question 3 options:

	The equilibrium real wage rate will increase and the equilibrium quantity of labor will decrease
	The equilibrium real wage rate will decrease and equilibrium quantity of labor will decrease
	The equilibrium real wage rate will increase and equilibrium quantity of labor will increase
	The equilibrium real wage rate will decrease and the equilibrium quantity of labor will increase

Question 4 (2.5 points)

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the equilibrium output level?

Question 4 options:

	The equilibrium output level will increase
	The equilibrium output level will decrease
	The equilibrium output level will remain constant
	Not enough information is given to determine the answer

Question 5 (2.5 points)

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage was perfectly flexible and given the change in the labor market, what would happen to the production function?

Question 5 options:

	A leftward movement along the production function (therefore no shift of the production function)
	A rightward movement along the production function (therefore no shift of the production function)
	An upward shift of the entire production function
	A downward shift of the entire production function

Question 6 (2.5 points)

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the marginal productivity of labor?

Question 6 options:

	There would be an increase in the marginal productivity of labor
	There would be a decrease in the marginal productivity of labor
	There would be no change in the marginal productivity of labor
	There is not enough information to determine if a change in the marginal productivity of labor would occur.