Suppose that the labor market is currently in equilibrium at a wage rate of $2.60. Suppose that the subsistence wage rate is $2.20. According to the classical theory of growth, which of the following describes subsequent events in the economy?
A) Population will grow because the current real wage rate is above the subsistence wage rate.
B) The economy is in equilibrium with labor supply equal to labor demand, so the economy stays at this real wage rate.
C) Population will decline because labor supply exceeds the subsistence level of labor supply.
D) Real wages will continue to grow above the subsistence level.
Correct Answer:
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