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) decreases; falls
B) increases; falls
C) decreases; rises
D) increases; rises

Question

Quizplus · Accepted Answer

When foreign incomes rise, U.S. exports will increase and there will be an increase in U.S. aggregate demand. As a result, output and employment will increase, causing firms to increase production and hire more workers. This will eventually lead to a shortage of labor, causing the money wage rate to rise. Therefore, the correct answer is D – increases; rises.

Suppose the Economy Was Initially in a Long-Run Equilibrium