1. Economic fluctuations in the classical model Aa Aa The following graphs show

Question

1. Economic fluctuations in the classical model Aa Aa The following graphs show the labor market for the fictional economy of Wilshire. For both scenarios, assume that the economy is initially operating at full employment with 50 million people employed. Now suppose that the labor demand curve (LD1) suddenly shifts to the left (LD2). REAL WAGE RATE 10 Ls 02LD LD1 20 40 60100 EMPLOYMENT Millions! Suppose the shift in demand causes the real wage and employment level to fall to point B True or False: This model, in which a shift in demand causes movement from point A to point 8, can be used to explain the rise of unemployment during a recession False O True Suppose the shift in demand was caused by a change in total spending but, rather than moving to point 8, the wage remains at $5, even after the leftward shift of the labor demand curve. Under the classical model, which of the following is true of this explanation for a recession? O O It is not possible, because changes in total spending cannot arise on their own. Accounting for wage rigidity explains recessions under the classical model.

Explanation / Answer

Question 1). Answer :- True.

Question 2). Answer :- Accounting for wage rigidity explains recessions under the classical model.

Question 3). Answer :- Real wage increase and employment increase. Shift in labor supply curve is due to sudden expansion in the number of people who prefer to do work.

Question 4). Answer :- Normally, the number of people who prefer to work does not change suddenly.

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