Figure 7-7
-Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at point K. If the policy-makers adopt a nonintervention policy, over time,
I. real wages will fall as long as unemployment remains above the natural rate.
II. lower nominal wages will result in a gradual shift from SRAS₂ to SRAS₁.
III. long-run equilibrium will be established at Y_P and P_h.

Question

Figure 7-7

-Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at point K. If the policy-makers adopt a nonintervention policy, over time,
I. real wages will fall as long as unemployment remains above the natural rate.
II. lower nominal wages will result in a gradual shift from SRAS₂ to SRAS₁.
III. long-run equilibrium will be established at Y_P and P_h.

Quizplus · Accepted Answer

In a nonintervention policy, the economy self-adjusts. Real wages fall if unemployment is above the natural rate, leading to lower nominal wages and a shift from SRAS2 to SRAS1, eventually restoring long-run equilibrium at YP and Ph.

Figure 7-7 -Refer to Figure 7-7. Suppose the Economy Is Initially in Is