How would each of the following events affect the level of employment and the real wage rate?(a)A tremendous boom occurs in the stock market, increasing people's wealth by $100 billion overnight.(b)A major government loan-guarantee program goes bust, losing $500 billion. To pay off the loss, the government announces that tax rates will rise 30% in the future.(c)A nuclear mishap contaminates all auto plants in the Detroit area, destroying their capital.(d)Medical science cures the common cold, causing fewer work days lost due to illness, thus greatly increasing labor productivity.
What will be an ideal response?
| (a) | Increased wealth reduces labor supply; the shift of the labor supply curve to the left brings a |
| (b) | The loss of wealth increases labor supply, leading to higher employment and a lower real wage. |
| (c) | The loss of capital lowers the marginal product of labor, reducing labor demand; the shift of the |
| (d) | Increased productivity increases the demand for labor; in equilibrium the real wage and |
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