When drawn against the real interest rate,the output supply curve is upward sloping because labor supply is
A) increasing in the real interest rate and labor demand is independent of the real interest rate.
B) decreasing in the real interest rate and labor demand is independent of the real interest rate.
C) independent of the real interest rate and labor demand is increasing in the real interest rate.
D) independent of the real interest rate and labor demand is decreasing in the real interest rate.

Question

Quizplus · Accepted Answer

An upward sloping output supply curve implies that firms are willing to supply more output at higher prices of their goods and services. In order to produce more output, firms need more inputs, including labor. As the real interest rate increases, the opportunity cost of leisure for workers also increases, making them more willing to work longer hours and supply more labor. Therefore, labor supply increases in response to higher real interest rates, leading to higher output supply. On the other hand, the level of labor demand is determined by factors such as technology, capital stock, and market conditions, which are independent of the real interest rate. Hence, the correct answer is A.

When Drawn Against the Real Interest Rate,the Output Supply Curve