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 scenario, the economy self-adjusts over time. Real wages will fall if unemployment is above the natural rate (I), leading to lower nominal wages and a shift in the short-run aggregate supply (SRAS) back to its original position (II), eventually restoring the economy to its long-run equilibrium (III).

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