Exhibit 20A-2 Macro AD/AS Models

-As shown in Panel (b)of Exhibit 20A-2,assume the economy adopts a classical nonintervention policy.Which of the following would cause the economy to self-correct?
A) Competition among firms for workers increases the nominal wage and SRAS shifts rightward.
B) Long-run equilibrium will be established at Y₁ and P₂.
C) Long-run equilibrium will be established at Yp and P₃.
D) Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Question

Exhibit 20A-2 Macro AD/AS Models
 
-As shown in Panel (b)of Exhibit 20A-2,assume the economy adopts a classical nonintervention policy.Which of the following would cause the economy to self-correct?
A) Competition among firms for workers increases the nominal wage and SRAS shifts rightward. 
B) Long-run equilibrium will be established at Y₁ and P₂. 
C) Long-run equilibrium will be established at Yp and P₃. 
D) Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Quizplus · Accepted Answer

Under a classical nonintervention policy, the economy will self-correct and return to its potential output level (Yp) in the long run. This is because wages and prices are flexible, and any deviations in output or employment from Yp will cause adjustments in wages/prices that eventually restore equilibrium. Panel (b) shows that in the long run, the AD curve will intersect the LRAS curve at point A₂, which corresponds to Yp and P₃. Therefore, the correct answer is C, as long-run equilibrium will be established at Yp and P₃.