The country of Stanley is at an above-full employment equilibrium. Which of the following events will return Stanley to full-employment?

Question

Quizplus · Accepted Answer

At above-full employment equilibrium, the economy is already using all its resources and any further increase in demand will lead to inflation. Therefore, increasing the quantity of money or government expenditures will only further increase demand and worsen inflationary pressures. Similarly, decreasing the interest rate will also increase demand and worsen inflation. The only option left is for an increase in the money wage rate, which will increase firms' costs and reduce their profits, leading to a decrease in demand and a return to full-employment equilibrium.

The Country of Stanley Is at an Above-Full Employment Equilibrium