Assume that the economy is initially operating at the natural level of output. An increase in government spending will cause:
A) an increase in the real wage in the medium run.
B) no change in the real wage in the medium run.
C) a decrease in the real wage in the medium run.
D) an increase in the nominal wage in the medium run.
E) a decrease in the nominal wage in the medium run.

Question

Quizplus · Accepted Answer

According to the classical dichotomy, changes in nominal variables like government spending do not affect real variables like the real wage in the long run. In the short run, however, an increase in government spending might result in a slight increase in the real wage due to an increase in aggregate demand. However, in the medium run, the economy adjusts and returns to the natural level of output, and the real wage should remain unchanged. Therefore, the correct option is B, no change in the real wage in the medium run.

Assume That the Economy Is Initially Operating at the Natural