Final answer:
Labor productivity rises when real GDP falls by 2% and work hours fall by 10%, since productivity is measured as output per hour and the output per hour has increased. The correct answer is option c.
Step-by-step explanation:
If real GDP falls by 2% while work hours fall by 10%, then labor productivity rises. This happens because labor productivity is calculated by dividing the total output (real GDP) by the total input (work hours). In this scenario, even though real GDP has fallen, it has not decreased as much proportionally as work hours, meaning that there is still more output per hour of labor.
Bringing context from the late 1990s, we saw that productivity unexpectedly rose, which is an instance of a positive surprise in economic terms. This increased productivity shifted the demand for labor, affecting unemployment rates and real wages. While these historical instances show the impacts of productivity on the economy, the direct relationship between real GDP and work hours with regards to productivity is that a smaller percentage decrease in GDP compared to hours worked results in increased productivity.
This conclusion is based on the understanding that labor productivity is the average output per labor hour. If the average output falls less than the average hours worked, it implies an increase in efficiency or productivity of labor.