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

Question

Quizplus · Accepted Answer

When foreign incomes rise, demand for Australian exports increases, leading to an increase in aggregate demand. In the long run, this increased demand can lead to higher prices and output, causing the money wage rate to rise as firms compete for labor.

Suppose the Economy Was Initially in a Long-Run Equilibrium