Question #380

The IMF and the European leaders all claim that Eurozone nations need to rely on internal devaluation to restore growth and so the austerity programs are designed to deflate nominal wages and prices. It is claimed that for each individual economy this strategy will render it more competitive as long as real unit labour costs fall faster than their trading partners. However, ignoring whether the logic is correct or not, which of the following propositions must also follow if the logic is to follow

• If wages and prices fall at the same rate, then labour productivity has to rise and employment remain constant or grow.
• If wages and prices fall at the same rate, then labour productivity has to rise and employment must grow.
• If wages and prices fall at the same rate, then labour productivity has to rise and what happens to employment is irrelevant.
• None of the above

Answer #2441

Answer: If wages and prices fall at the same rate, then labour productivity has to rise and what happens to employment is irrelevant.

Explanation

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