Start at full-employment __(FE)__ equilibrium with flexible wages and worker misperception of...
Question:
Start at full-employment (FE) equilibrium with flexible wages and worker misperception of price level changes in the short run. Suppose then that we have an increase in Aggregate Demand. First, think about the short-run effects on price level (P), output level (Q), wage level (W), employment (L), and unemployment (U)? In the long run, once workers realize that there was a change in the price level, they will change the supply curve of labor. When all subsequent wage and price adjustments take place, we will be in a new long-run equilibrium. From the original full-employment (FE) equilibrium to the final one, what is the net change in the price level (P), output level (Q), unemployment (U), and the real wage (W/P)?
a) No change in P, no change in Q, an increase in U, and no change in W/P,
b) No change in P, an increase in Q, an increase in U, and an increase in W/P,
c) An increase in P, an increase in Q, no change in U, and a decrease in W/P,
d) An increase in P, no change in Q, no change in U, and no change in W/P,
e) An increase in P, no change in Q, an increase in U, and no change in W/P.
Long-run Economics:
Many economists argue that the government doesn't need to intervene in the economy during a recession or boom as it is self-correcting. Wages may be sticky, but workers will eventually see that the prices level has changed and adjust the supply of labor accordingly.
Answer and Explanation: 1
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In the long-run, workers will adjust their supply curve of labor and any excess demand or supply of labor is eliminated. Further, the real...
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Aggregate Supply and Aggregate Demand (AS-AD) Model
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Chapter 7 / Lesson 3
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Understand the aggregate demand-aggregate supply model and its features. Read more about the curve shifts of this and learn the AD-AS model through an example.
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