Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) 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

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2

-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) 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-corrects. Real wages fall if unemployment is above the natural rate, leading to lower nominal wages and a rightward shift in SRAS, restoring long-run equilibrium at potential output (Y_P) and price level (P_h).

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