In the Keynesian model with efficiency wages
A)the full-employment line is determined where the quantity of labor demanded equals the quantity of labor supplied.
B)the full-employment level is determined at the intersection of the labor demand curve and the efficiency wage line.
C)an increase in labor supply increases employment.
D)a decrease in labor supply shifts the FE line to the left.

Question

Quizplus · Accepted Answer

In the Keynesian model with efficiency wages, the full-employment level is determined at the intersection of the labor demand curve and the efficiency wage line. This is where the wage rate is at a level such that firms can attract and retain the desired quantity of labor. The full-employment line is not determined where the quantity of labor demanded equals the quantity of labor supplied (choice A), because there may be a level of wages where firms can neither attract nor retain enough workers to satisfy their demands. An increase in labor supply may not necessarily increase employment due to efficiency wage considerations (choice C) and a decrease in labor supply may not necessarily shift the FE line to the left as it depends on the reason behind the decrease in supply (choice D).

In the Keynesian Model with Efficiency Wages