Figure 17-1
-In the Friedman "Fooling Model" if P(e) is less than P then the labor supply curve in the figure above
A) shifts leftward when workers realize their error.
B) always shifts rightward.
C) initially remains the same.
D) Both A and C are correct.

Question

Figure 17-1 
-In the Friedman "Fooling Model" if P(e) is less than P then the labor supply curve in the figure above
A) shifts leftward when workers realize their error. 
B) always shifts rightward. 
C) initially remains the same. 
D) Both A and C are correct.

Quizplus · Accepted Answer

Initially, the labor supply curve remains the same because workers are "fooled" by the lower expected price level (P(e) < P). Once workers realize their error, the labor supply curve shifts leftward as they adjust their expectations.

Figure 17-1 -In the Friedman "Fooling Model" If P(e) Is Less Than