Exhibit 20A-2 Macro AD/AS Models

-As shown in Panel (a)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 Y₁ 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 (a)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 Y₁ and P₃. 
D) Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Quizplus · Accepted Answer

In a classical nonintervention policy, the economy self-corrects through wage and price flexibility. When there is unemployment, competition among unemployed workers can lead to a decrease in nominal wages, which shifts the short-run aggregate supply (SRAS) curve rightward, moving the economy back to long-run equilibrium.