FIGURE 24-1
-Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the
A) economy will eventually move to point B.
B) economy will move only slowly toward point A as wages slowly adjust.
C) economy will quickly move to point A.
D) level of output will decrease below Y0.
E) AD curve will eventually shift to the right and return the economy to its full -employment level of output.

Question

FIGURE 24-1
-Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the
A) economy will eventually move to point B. 
B) economy will move only slowly toward point A as wages slowly adjust. 
C) economy will quickly move to point A. 
D) level of output will decrease below Y0. 
E) AD curve will eventually shift to the right and return the economy to its full -employment level of output.

Quizplus · Accepted Answer

If wages are sticky downwards, then the economy will only slowly adjust towards point A as firms will be reluctant to reduce wages. As a result, there will be a short-run decrease in employment and output, with the economy moving along the SRAS curve towards point A. However, over time, as firms adjust their prices, the SRAS curve will shift downwards, leading to a lower price level and a higher level of output. Therefore, the economy will eventually move to point A, but it will do so slowly as wages adjust.

FIGURE 24-1 -Refer to Figure 24-1. If the Economy Is Currently Producing