Suppose the economy was initially in a long- run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand and eventually the money wage rate
)
A) increases; falls
B) decreases; rises
C) increases; rises
D) decreases; falls

Question

Quizplus · Accepted Answer

With an expansion of the world economy and a rise in foreign incomes, there will be an increase in demand for U.S. products, causing an increase in U.S. aggregate demand. As a result, firms will have a greater demand for workers, pushing up employment and eventually the money wage rate. This will lead to an increase in the general price level, but the economy will still remain in a long-run equilibrium with a higher level of output and prices.

Suppose the Economy Was Initially in a Long- Run Equilibrium