Macroeconomics Multiple Choice Question. What are the answers to c) and d)? c) L

Question

Macroeconomics Multiple Choice Question. What are the answers to c) and d)?

c) LAS Inflation ASi 3% AS 290 ADo In the diagram, if wage rates had been increasing at 2% a year and the inflationary gap increased that rate of age growth to 3% a ear: AS would shift up from AS0 to AS1 and real GDP would fall to Y1 at = 1. AS would shift down from AS1 to ASo with real GDP at Yp. AS would be unaffected and remain at ASo and real GDP would be unchanged at Y1 AS would be unaffected but real GDP would fall from Yo to YP at = 2%. d) The economy's built in adjustment to eliminate persistent recessionary gaps depends on labour market adjustments to unemployment rates higher then the natural rate However, wage rates do not respond quickly because different workers and employers have wage rate contracts that overlap in time wage bargaining is a pleasant process that both workers and employers enjoy. wage rates are set by annual auctions for labour services. workers and employers can never agree on new wage rates and job action results.

Explanation / Answer

(c)

Wage rate has been increasing at 2% a year. This means that wage rate is expected to increase by 2% a year. This expected increase will be factored in by the firms in their cost of production and profit margin. However, if rate of wage growth increases to 3% then this will increase the cost of production of firma and will reduce their profit-margin.

This will induce them to decrease production and thus will lead to decrease in aggregate supply. This will shift aggregate supply curve upward from AS0 to AS1 and real GDP in economy will decrease from Y0 to Y1.

Hence, the correct answer is the option (1).

(d)

Wage rate do not respond quickly because wages are tends to be sticky. In other words, wages take time to adjust. The reason behind this is that different workers and employers have wage rate contracts that overlap time.

Hence, the correct answer is the option (1).

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